While it’s true that all you need to start building a credit history is one credit account, maintaining a mix of multiple accounts with different credit types is an important part of establishing healthy credit behavior.
Your credit mix consists of different accounts, sometimes called “tradelines” on your credit report. Beyond seeing if you have more than one line of credit, creditors are also typically looking for borrowers who can handle different types of credit.
The most common types of credit are classified as either installment or revolving.
Installment credit can refer to any debt where the borrower pays in installments over a period of time. This could be a student loan, mortgage, home equity loan, car loan, or other personal loan.
Revolving credit typically refers to a credit card, though there are other types of revolving credit as well. With revolving credit, a bank or other financial institution lends you money up to a maximum amount. This credit line remains open and accessible, so that you can use it when you need it in the future. A home equity line of credit (HELOC) can also be referred to as revolving credit, as can a retail charge card because it works much like a regular credit card.
Showing diversity within your credit report
When you open and use a variety of credit lines over a long period of time, your credit report will reflect this diversity. The longer you have these accounts open, the more time you have to show how you can be responsible with different types of tradelines.
How you handle different types of credit can also show potential lenders how you might manage any new types for which you apply. For example, a consumer who has only ever used a credit card (revolving credit) but who then applies for a mortgage (installment credit) won’t have much information on his credit report to show his ability to pay off this type of tradeline.
The other factor that is reflected in your credit mix is how many types of each tradeline you have. Ideally, you will have four types of credit lines so that you can show lenders your reliability. For example, you may have a student loan, a credit card, a retail credit card, and an auto loan.
While your credit mix plays an important role in your credit history and ultimately calculating your credit score, the following five factors also play important roles:
• The number of accounts you have
• The types of accounts
• Your used credit vs. your available credit
• The length of your credit history
• Your payment history
Diane Moogalian is vice president of operations for Equifax Personal Information Solutions. Prior to joining Equifax in 2007, Diane held several strategic roles with leading financial services companies.
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