What is a Credit Mix and How Does it Affect Credit Scores?

Highlights:

  • A credit mix refers to the different types of credit accounts you have

  • The impact of a credit mix on your credit scores varies, depending on the credit scoring model used

  • Lenders and creditors generally want to know how you have managed different types of accounts over time

Whether you’ve already established a credit history or you’re wondering how to get started building one, you may not know what a “credit mix” means – or how it may affect your credit scores.

Simply put, a credit mix refers to the types of different credit accounts you have – mortgages, loans, credit cards, etc. It’s one factor generally considered when calculating your credit scores, although the weight it’s given may vary depending on the credit scoring model (ways of calculating credit scores) used. In general, lenders and creditors like to see that you’ve been able to manage different types of credit accounts responsibly over time.

Generally, there are four different types of accounts you may find on your Equifax credit report:

Installment loans

An installment loan is a loan that’s paid back, generally with interest, through regular payments over a period of time, and the payment amount typically stays the same. When the loan is repaid, the money cannot be re-used, as it would be with a revolving account. An example of an installment loan would be a vehicle loan.

Revolving debt  

With revolving debt, you borrow money up to a certain amount (your credit limit) and pay it back – or pay a minimum payment, generally with interest, while carrying a balance. Once that amount has been paid back, it is then available to be borrowed again. An example of revolving debt would be credit cards or lines of credit.

Mortgage

A mortgage account is a type of installment loan used for purchasing real estate. If the lender or creditor reports to one or both of the nationwide credit bureaus, your mortgage account typically shows up on credit reports provided by that bureau or bureaus. Mortgage accounts may differ from other types of installment loans, as the interest rate can be fixed or variable. Fixed interest rates stay the same, while variable interest rates may change.

Open accounts

These types of accounts often involve “service credit,” where a service is provided before payment, with the balance due at the end of the payment period. An example of these would be monthly contract-based mobile phone plans.

Successfully maintaining a diverse mix of credit may affect your credit scores positively. That doesn’t mean that you should open credit accounts you don’t need: instead, you might want to think twice about closing a paid-off account, since doing so might have a negative impact on your credit scores for several reasons. For instance, closing the account may affect your debt to credit ratio, or the amount of credit you're using compared to the total amount available to you. Keeping the account open and using it occasionally may help maintain a healthy credit mix.

Keep in mind that your credit mix is generally one of the smaller factors in credit score calculations. Other factors that may be used to calculate your credit scores include your payment history on your accounts; the length of your credit history; your debt to credit ratio, as mentioned above; and how much you owe on your credit accounts.

Why Do I Have Different Credit Scores?

Highlights:

  • You don’t have just one credit score

  • Your credit scores are calculated based on information in your credit reports

  • There are many different ways of calculating credit scores, or scoring models

Your credit scores can play a significant role in your financial life, but understanding those three-digit numbers can be confusing.

You don’t have just one credit score; there are many different credit scores provided by different companies, and many different scoring models, or ways of calculating credit scores. It’s also normal for credit scores to fluctuate.

It’s important to understand credit scores and how they are calculated, especially if you intend to apply for credit, such as a mortgage or a vehicle loan, in the future.

What is a credit score?

Your credit scores, displayed as a number generally ranging between 300 and 900, serve as an estimation of how likely you are to pay your bills on time. They are based on your credit account history as reported by lenders to one or both of the two nationwide credit bureaus – Equifax and TransUnion – and reflected in your credit reports. Higher credit scores generally indicate that you have responsibly managed credit accounts in the past, meaning lenders and creditors may view you as a lower-risk borrower.

Why might credit scores differ?

There are several reasons why credit scores may differ. These include:

Differences between credit bureaus: As mentioned, not every lender and creditor reports to both credit bureaus – they may report to only one, or none at all. In addition, lenders and creditors may report to the credit bureau or bureaus at different times, meaning one credit score may reflect the most recent information, while another may not.

Differences in credit scoring models: While all credit score models have the same purpose (to predict the likelihood of timely bill payment), there are some differences in the calculations. In general, factors that affect credit scores include your payment history, the amount of available credit you’re using, public records such as bankruptcies, and the length of your credit history. But different credit scoring models may assign a varying weight to these factors and, depending on the model used, the scores may differ.

Types of data included in credit scoring calculations: The credit lending community uses different credit scoring models for different purposes. Each score is built using slightly different factors, depending on its intended use. Some credit score models may incorporate mortgage and/or mobile phone payment information in the calculation, for instance, while others may not.

While credit scores are important, they are only one of several pieces of information an organization will generally use to evaluate your creditworthiness. For example, a mortgage lender would likely want to know your income as well as other information in addition to your credit score before it makes a decision.

It may also be a good idea to check your credit reports regularly – you’ll want to ensure all the information is accurate and complete. If you see something on your credit reports you believe is inaccurate or incomplete, or you see the information you don't recognize that could indicate potential fraud, you can contact the lender directly or file a dispute with the credit bureau that provided the report so it can be investigated.

Why Do Credit Scores Change?

Highlights:

  • It’s completely normal for your credit scores to fluctuate

  • Information in your credit reports is updated as it is reported to credit bureaus

  • The passage of time can also cause changes in credit scores

If you’re tracking your credit scores over time, you may notice the three-digit numbers may change, even if the credit score is generated by the same credit bureau or company.

It’s completely normal for credit scores to change. But why does this happen? Here are a few reasons:

Changing information on your credit report

Your credit scores are a snapshot in time that changes based on your credit behaviors and the information in your credit reports, which is updated regularly. Credit scores are calculated based on information in your credit reports. That information is updated as new data is reported to credit bureaus by lenders, collection agencies, or other sources.

That data could include balance changes, the opening of new accounts, payments on existing accounts, or closed accounts falling off your credit report after a period of time has expired. If you check one credit score in January and then again in March, for instance, the credit score may have changed based on changes in account activity reported to the two nationwide credit bureaus – Equifax and TransUnion -- during that time.

Differences among credit bureaus

While a credit score from one of the two credit bureaus may rise and fall, you may also see differences in credit scores furnished by the other bureau.

Some lenders and creditors report to both nationwide credit bureaus, but others may report to only one – or none at all. That means information that each credit bureau uses to calculate your credit score may differ. In addition, there are different scoring models used by credit bureaus and by companies to calculate credit scores, so even if your data is the same across both nationwide credit bureaus, the credit scores may differ.

It’s about time

Even if there are no changes or updates to your credit reports, the passage of time could cause fluctuations in credit scores. If you have a late credit card payment, its effect on credit scores may diminish over time. That doesn’t mean that it’s OK to make a late payment. One of the best habits you can get into is paying your bills on time every time.

Payment history

Making payments on credit accounts is a common cause of changes in credit scores, as payment history is typically the largest factor used to calculate credit scores, depending on the credit scoring model used. If you make payments on your credit cards or installment loans, your payment history may be reported to credit bureaus, which may cause changes in credit scores.

Debt-to-credit ratio

Your debt-to-credit ratio is how much of your available credit you’re using, and it also factors into credit scores and may cause credit scores to fluctuate. For instance, if your credit card balances change month to month, and the amount of available credit you’re using changes, you may see fluctuations in credit scores as well.  

Payments may also impact your debt-to-credit utilization ratio and may also cause credit scores to change. Your debt-to-credit ratio takes into account all of your available credit versus the total of all your balances owed.

Different credit scoring systems

There are many different credit scoring models, and lenders and creditors may use different scores to help decide whether to grant you credit. They may also consider other factors, such as your income.

While credit score changes are normal, it’s important to ensure the changes don’t result from inaccurate or incomplete information on your credit reports. It’s a good idea to regularly review your credit reports from both credit bureaus. Make sure your personal and account information is correct and complete and there are no accounts or balances you don’t recognize. If you find something you believe may be inaccurate or incomplete, contact the lender directly. You can also file a dispute with the credit bureau reporting the information.

5 Things to Know About Your Credit Scores

Highlights:

  • Closing a paid-off credit card account may negatively impact credit scores

  • There are several reasons why your credit scores may increase or decrease

  • A good credit score doesn't necessarily guarantee you'll get credit

Most people know that higher credit scores are desirable, but there are still misconceptions around those three-digit numbers, what they may mean, what impacts them and why credit scores from different providers may vary.

Credit scores are calculated based on information in your credit reports, reported to credit bureaus by lenders, collection agencies, and other sources. As that information is updated, it may result in changes to your credit scores, depending on the credit scoring model used.

Here, we answer five questions regarding credit scores:

Q. Does closing a paid-off credit card account impact credit scores?

A. While it depends on your unique credit situation, consider the following:

  • Closing a credit card could lower the amount of overall credit you have versus the amount of credit you're using (your debt to credit utilization ratio), which could negatively impact your credit scores. You can calculate your debt to credit utilization ratio by adding all your available credit and all the debt you owe on those accounts. Divide the total debt by the total available credit. Creditors and lenders often like to see a lower ratio of how much debt you have compared with how much available credit you have.

  • Closing a credit card account you’ve had for a long time may decrease the average age of accounts on your credit history, which is another factor generally used to calculate credit scores. It may also change the age of your oldest account. In general, creditors like to see you’ve been able to properly handle credit accounts over a period of time.  

  • If you have a paid-off credit card you haven't used in a certain period of time, it may be declared inactive and closed by the lender.

Q. Does having a perfect credit score matter?

A. While achieving a perfect credit score may seem enticing, any credit score within the "excellent" range will generally mean access to more competitive rates and terms.

Q. Why do your credit scores fluctuate?

A. There are several reasons why your credit scores may fluctuate or why they may vary depending on the credit bureau or company providing them. It’s important to know that fluctuation is normal when it comes to credit scores. Here are some of the reasons why this might happen:

  • Changing information. Credit scores are calculated based on information in your credit reports. That information is regularly updated as lenders and creditors, collection agencies, and other sources report information to the two nationwide credit bureaus. The data could include balance changes reported monthly by lenders and creditors, the opening of new accounts, or payments on existing accounts.

  • Differences among credit bureaus. Some lenders and creditors report to both nationwide credit bureaus, while others may report to only one (or none at all). This means information used by the credit bureaus or by other companies to calculate your credit score may differ. In addition, there are different credit scoring models used by credit bureaus and companies to calculate credit scores.

  • Time. The passage of time may cause fluctuations in credit scores. For instance, if you made a late credit card payment, its effect on your credit scores may diminish as time passes. That doesn’t mean late payments are OK; it’s always best to pay on time, every time.

  • Payment history. Paying down balances on credit accounts can result in changing credit scores, as payment history is typically the most heavily weighted factor used to calculate credit scores, depending on the credit scoring model used.

  • Debt-to-credit ratio. Your debt-to-credit ratio is how much credit you are using compared to the total amount available to you (your credit limits). It is also one factor that may cause credit scores to increase or decrease. For instance, if your credit card balances change month to month, and the amount of available credit you’re using changes, your credit scores may change as well.

  • Different credit scoring models. There are a number of different credit scores available, and they may not be the same depending on the specific credit scoring model used. Some lenders may use credit scores that are specific to a certain industry – if you’re buying a vehicle, for instance, the credit scoring model the lender uses may weigh your payment history on vehicle loans more heavily. These credit scores will differ based on the industry and are not the same as the credit scores you may receive from the two nationwide credit bureaus.

While increases and decreases in your credit scores are normal, it’s important to ensure the changes don’t result from inaccurate or incomplete information on your credit reports. It’s a good idea to regularly review your credit reports from the two major credit bureaus.

Q.  Does every inquiry impact credit scores?

A. Simply put, an inquiry occurs when you or another company or individual requests access to your credit report. There are two types of inquiries: “hard” and “soft” inquiries.

Hard inquiries may negatively impact credit scores. These result from a company or individual checking your credit reports in response to your application for credit. Examples of hard inquiries would be those resulting from your application for a credit card, a vehicle loan, or a mortgage.

One thing to know: If you’re shopping around for the best loan terms on a vehicle or mortgage loan, generally only one of those hard inquiries with a specified window of time will impact your credit scores. Depending on the credit scoring model used, the time period is typically 7 to 45 days. This exception doesn’t apply to credit cards, though – if you apply for multiple credit cards, each hard inquiry may impact credit scores.

“Soft” inquiries do not impact credit scores. Examples of soft inquiries might be you checking your own credit reports or an existing creditor reviewing your credit reports in connection with a periodic review of your account (known as “account review”).

Q. Does a good credit score guarantee you’ll get credit?

A. Not necessarily. While having a good credit history can be helpful in getting better loan terms, lenders and creditors use many factors to help decide whether to extend your credit and on what terms and credit scores may be only one of them. Those factors may include information such as your income, your down payment, or the amount of the loan.

How Can You Check Your Credit Scores?

Highlights:

  • Credit reports usually do not contain credit scores

  • There are many different credit scores and credit scoring models

  • You can purchase credit scores from a credit bureau or get one free from some banks and credit unions

Many people think if you check your credit reports from the two nationwide credit bureaus, you’ll see credit scores as well. But that’s not the case: credit reports do not usually contain credit scores. Before we talk about where you can check your credit scores, there are a few things to know about credit scores, themselves.

One of the first things to know is that you don’t have only one credit score; there are many different scores used by lenders and other organizations. Credit scores are designed to represent your credit risk, or the likelihood you will pay your bills on time.

Credit scores are calculated based on a method using the content of your credit reports. The credit scores available to you are often called “educational scores”; that means it’s provided to you for your own education but isn’t necessarily the same scores being used by lenders.

Score providers, such as the credit bureaus Equifax and TransUnion along with companies like FICO, use different types of credit scoring models and may use different information to calculate credit scores. Credit scores provided by the two nationwide credit bureaus may also vary because some lenders may report information to both, one or none at all.  And lenders and creditors may use additional information, other than credit scores, to decide whether to grant you credit.

So how can you check your credit scores? Here are a few ways:

  • Purchase credit scores from a Canadian credit bureau. Both Equifax and TransUnion provide credit scores for a fee. Credit scores can be purchased online, in person, or by mail. The credit score provided by each credit bureau is the bureau’s proprietary score.

  • Your bank or credit union. Some banks and credit unions offer credit scores free for customers through online banking sites and/or mobile apps. However, the credit score a bank or credit union shows its customers may not be the same score the bank or credit union uses to make lending or other decisions. If you obtain a credit score through a bank or credit union, it usually indicates which credit bureau or company has provided the score.

  • Other sources. Depending on where in Canada you live, you may be able to use a free credit scoring site. Some other organizations offer free credit scores to people who sign up for their services and receive a no-obligation credit card or loan offer.

How Are Credit Scores Calculated?

Highlights:

  • Credit scores are designed to predict the likelihood that individuals will pay their bills as agreed

  • Credit scores are only one of several pieces of information used to determine your creditworthiness

  • Payment history, the amount of credit you’re using, and the length of your credit history are factors included in calculating your credit scores

Credit scores are intended to help financial risk managers and others make fair decisions on whether or not to “take a risk” on someone. The risk might involve giving that person a loan (will they repay it?), offering a credit card (will they make the payments?), or approving their apartment rental application (will they pay their rent?). Credit scores are designed to predict the likelihood that individuals will pay their bills as agreed.

While your credit score is important, it is only one of several pieces of information an organization will use to determine your creditworthiness. For example, a mortgage lender would want to know your income as well as other information in addition to your credit score before it makes a decision.

The main factors involved in calculating a credit score are:

  • Your payment history

  • Your used credit vs. your available credit

  • The length of your credit history

  • Public records

  • Number of inquiries into your credit file

If you look at your credit scores based on data from both national credit reporting agencies – Equifax and TransUnion – you may see different scores. This is completely normal. Each credit bureau has multiple scoring algorithms and lenders typically request only one of them when making decisions. While all score versions have the same purpose (to predict the likelihood people will pay their bills), there are some differences in the calculations.

There are many different scoring models and here is a general breakdown of the factors the models consider:

Payment history: ~35%

Your credit history includes information about how you have repaid the credit you have already been extended on credit accounts such as credit cards, lines of credit, retail department store accounts, installment loans, auto loans, student loans, finance company accounts, home equity loans and mortgage loans for primary, secondary, vacation and investment properties.

In addition to reporting the number and type of credit accounts that you’ve paid on time, this category also includes details on late or missed payments, public record items, and collection information. Credit scoring models look at how late your payments were, how much was owed, and how recently and how often you missed a payment. Your credit history will also detail how many of your credit accounts are delinquent in relation to all of your accounts on file. For example, if you have 10 credit accounts (known as “tradelines” in the credit industry), and you’ve had a late payment in 5 of those accounts, that ratio may impact your credit score.

Used credit vs. available credit: ~30%

A key part of your credit score analyzes how much of the total available credit is being used on your credit cards, as well as any other revolving lines of credit. A revolving line of credit is a type of loan that allows you to borrow, repay, and then reuse the credit line up to its available limit.

Also included in this factor is the total line of credit or credit limit. This is the maximum amount you could charge against a particular credit account, say $2,500 on a credit card.

Credit history: ~15%

This section of your credit file details how long your credit accounts have been in existence. The credit score calculation typically includes both how long your oldest and most recent accounts have been open. In general, creditors like to see that you’ve been able to properly handle credit accounts over a period of time.

Public Records: ~10%

Those who have a prior history of bankruptcy, or have had collection issues or other derogatory public records may be considered risky. The presence of these events may have a significant negative impact on a credit score.

Inquiries: ~10%

Anytime an individual’s credit file is accessed for any reason, the request for information is logged on the file as an inquiry. Inquiries require the consent of the individual and some may affect the individual’s credit score calculation. The only inquiries which may impact a credit score are those related to active credit seeking (such as applying for a new loan or credit card). These inquiries are known in industry jargon as “hard pulls” or “hard hits” on your credit file. The hard inquiry may be the leading indicator, the first sign of financial distress that appears on the credit file. Of course, not every inquiry is a sign of financial difficulty, and only a number of recent inquiries, in combination with other warning signals on the credit file should lead to a significant decline in a credit score.

Your credit score does not take into account requests a creditor has made for your credit file or credit score in order to make a pre-approved credit offer, or to review your account with them, nor does it take into account your own request for a copy of your credit history. These are some examples of "soft inquiries" or "soft pulls" of your credit.

What Factors Impact My Credit Scores?

Highlights:

  • One of the key behaviors lenders and creditors like to see is on-time bill payments

  • Credit scoring models generally look at the mix of different types of credit accounts you have

  • Lenders and creditors prefer to see a lower ratio of how much debt you're carrying compared to how much available credit you have

Regardless of the financial milestones, you’re reaching, when it comes to financial progress and credit, it’s important to understand the factors that may impact your credit scores. Consider the following:

Have you generally made payments on time?
One of the key behaviors that lenders and creditors typically like to see is the on-time payment of bills. Since this is one of the strongest predictors that you are likely to meet your financial obligations, it is generally an important factor in credit scoring models (different ways of calculating credit scores).

Do you have different types of credit accounts?
While there are many different credit scoring models, they generally factor in the mix of different types of credit you have, such as credit cards, installment loans, mortgages, and store accounts. If you have too many different credit accounts – or don’t have a mix of different types -- it could negatively impact credit scores.

How many new credit accounts have you opened?
Be mindful of opening too many accounts at once and not opening more accounts than you need. Credit scoring models  usually look at how many new accounts you have as well as how many new accounts you've applied for recently. Having too many new accounts may indicate to lenders and creditors that you’re taking on a lot of new debt and may be a high-risk borrower.

How old are your credit accounts?
In general, creditors and lenders like to see that you’ve been able to properly handle credit accounts over a period of time. Credit accounts with a longer history showing responsible credit behaviour will reflect positively on credit scores. Newer accounts will lower your average account age, which may negatively impact credit scores.

Are your balances high relative to your total available credit limit?
Creditors and lenders prefer to see a lower debt to credit ratio – that’s the amount of credit you’re using compared to the total amount available to you. If all your credit cards are near the credit limit, for example, this may negatively impact credit scores and may indicate to lenders or creditors that you may have too much debt.

Do you have any judgments, liens, foreclosures, bankruptcies, or delinquencies that have been reported to the credit bureaus?
Having this type of information on your credit history may negatively impact credit scores. If you have gone through financial hardship, and had to file for bankruptcy or completed a foreclosure, credit scores may reflect this negative information for several years.

What are some other factors that might negatively affect credit scores?
There are several other factors that might affect credit scores – having a past-due account transferred to a collection agency or debt buyer, for example. It’s important to note that lenders view these factors in different ways.

How Can Student Loans Affect Your Credit?

Highlights:

  • Paying student loans as agreed may help establish smart credit habits

  • Student loans operate as installments, similar to a car loan or a mortgage

  • Your student loan repayment plan becomes part of your payment history, which is factored into calculating credit scores

Given the cost of post-secondary education, student loans are much more of a reality today than they were for previous generations. This means student loans must be a key part of family discussions on college or university. While student loans may feel like a burden, paying them on time may actually help establish smart credit habits early in life.

Consider future student loan payments as part of your decision.

Heavy student loan debt can be a tremendous burden on new graduates. It can limit their choices of jobs because they often must earn enough to pay off their debt, especially if they can’t count on financial help from parents or other family members. In the long run, significant student loan debt, like any other debt, might also delay or limit the borrower’s ability to buy a home, start a business, or even begin a family. But learning more about student loans and repaying them may help dispel some of these concerns — including how they may impact your credit.

Here are some of the ways your student loans might affect your credit and what you can do to handle them responsibly.

A student loan, like a car loan or mortgage, operates as an installment loan, meaning that the borrower repays a principal amount, with accumulated interest, over a certain period of time. Unlike a credit card account that someone might keep open for future use, once an installment loan is paid off, the account is closed. Your student loans will affect your debt-to-income ratio — the amount of debt you carry compared to your overall income — which, if especially high, may affect your ability to obtain new credit.

Your student loan repayment plan becomes part of your payment history, which is the biggest element considered when calculating credit scores. Knowing when your first payment is due is important, but first, you need to decide which repayment plan is best for you.

The payment plan you choose will determine your minimum monthly payment, so it is important to understand what you can afford to pay and how your payments will affect your credit. Making on-time payments every month is a positive habit to get into, but if your payments are so low that you are not lowering the original amount you borrowed or so high that you can’t make payments on other accounts, it may be time to identify other options.

For many borrowers, student loans are not only an opportunity to get an education but also to prove that you can pay back loans responsibly. Making on-time payments and paying off student loan debt are important steps in building healthy credit and laying a solid foundation for your financial future.