When it comes to understanding what makes up your credit scores, credit mix and inquiries tend to cause confusion.
Together, these two categories make up 20% of your credit scores. So even though they aren’t individually as heavy-hitting as payment history, for instance, they are still important.
Clearing Up the Confusion
So let’s break down what these items are, what they do to your credit, and what you can do about it…
“Credit mix” simply means the variety of types of accounts that you hold. According to credit scoring company FICO:
FICO® Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It’s not necessary to have one of each, and it’s not a good idea to open credit accounts you don’t intend to use.
Your mix, or variety, of credit types will make a greater impact if your account history is short. On the other hand, if you have a long credit history, credit mix becomes less of a factor.
Inquiries, aka new accounts or applications, are records usually found at the end of your credit report. They show any request for access to your credit report.
You don’t need to worry about accessing your credit report yourself, as this has no effect on your credit scores.
On the other hand, when a lender “pulls” your credit report during the application process, this will result in a “hard inquiry” on your credit report.
Each hard inquiry causes a reduction of your credit scores by a couple of points. Inquiries remain on your credit report for up to two years, but FICO only factors them into your credit scores for up to one year.
Credit Mix Tips
The most important advice for taking on loans and credit is to make sure you only take on as much debt as you can afford to pay back.
A history of on-time payments and low balances will always make a far bigger difference to your credit scores than the types of accounts you’re late on.
Another important thing to keep in mind is that loans will often lower your credit score for the first few months, until you have a history of timely payments.
However, there are methods and strategies for adding new credit wisely to increase your credit scores.
Having too many inquiries within the period of a year can indicate to lenders that you are applying for as much credit as possible and may not be able to pay it back.
However, ironically, “spacing out” your applications can actually cause you greater problems. As FICO says:
Shopping for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
It might seem obvious, but it’s best to only apply for credit cards you have a good chance of qualifying for. Don’t get sucked in by “preapproved” black/diamond/100,000 air miles, etc — if it sounds too good to be true, you may only harm your credit.
Taking care of serious credit issues, like disputing errors and stopping collections, should take priority over credit mix and inquiries.
But once you have the most important factors covered, adding the right account or challenging certain inquiries can give your credit score just enough of a boost to put your credit scores and profile into the next tier…
Which could potentially save you thousands of dollars in interest! We have credit professionals standing by to help you understand and master your credit. Just reach out to us to find out more.