Credit diversity, as the name implies, expresses how many different credit lines or types of credit you have. Credit types include mortgages, loans, credit cards, installment loans, and open accounts.
Greater credit diversity can improve your credit score, but opening new accounts that you don’t need will not necessarily help. Here is what you need to know about credit diversity!
What is credit diversity and why is it important?
Credit diversity refers to the mix of different types of credit accounts that you currently have open. If you have a credit card but you don’t have a mortgage or any other loans, your credit is not considered diverse. Credit diversity can improve your credit score and assure lenders of your creditworthiness all at once.
Types of credit
In general, each credit type falls into one of two primary categories: installment loans and revolving debt. Installments loans come with predetermined monthly payments. Revolving debt, or revolving credit, does not require monthly payments, though it generally has a maximum limit and a minimum payment requirement. Here is how each of these two categories of credit works.
Credit cards and lines of credit fall into the category of revolving debt. With a credit card or line of credit, you’ll have a maximum credit limit as well as a minimum monthly payment requirement.
For example, let’s say your credit card has a $5,000 limit. The minimum monthly payment will increase as you spend more of your available credit line. You’ll have the option to pay the existing amount in full, the minimum payment, or something in between.
Credit cards and lines of credit typically carry high-interest rates on any charges that are not paid off before the next billing cycle. This type of credit is not recommended for long-term payments due to a large amount of money you will end up paying in interest.
Installment loans carry a much lower interest rate than revolving credit. With an installment loan, you’ll borrow a lump sum of money and pay it off in fixed payments over a set period of time. Mortgages, student loans, auto loans, and business loans are all types of installment loans.
With installment loans, the interest rate can be either fixed or variable. A fixed interest rate will remain stable for the duration of the loan, while a variable interest rate will reflect your current market interest rates.
With open credit, the full balance will be due at the end of each month. Your electricity bill or water bill are examples of open credit. The amount of money that you owe will vary, but the total amount charged will still be due at the end of the month.
The electrical or water company is essentially giving you access to water and electricity for the month in the form of credit, and then your payment will be due at the end of the month, as though you are paying back the credit they extended to you. Open credit accounts are also common in business transactions and in circumstances involving in-store credit.
What is a good credit mix?
A good credit mix is one that includes both revolving credit and installment loans. There isn’t a magic percentage that translates into an ideal credit score. Instead, consumers of all income levels and ages should be able to achieve a good credit score by having two to three open credit lines. Here are some examples of good credit mixes:
- Peter (age 20): Open credit for electricity and water, a credit card, and student loans
- Josh (age 30): A store line of credit, credit cards, and an auto loan
- Alice (age 40): Credit cards, student loans, a business loan, and a mortgage
- Susan (age 50): Credit cards and mortgage payments
Note that in all cases, in order to achieve a good credit score, you should make payments on time. Also, try to pay off your credit card balances and other revolving credit lines as quickly as possible.
Why does credit diversity help your overall credit score?
How important is credit diversity? Credit diversity accounts for 10% of your credit score, so it’s relatively important. While it is not the most influential factor, it can be a way to quickly increase your credit score.
For example, taking advantage of a MoneyLion Credit Builder Loan can help you diversify your credit and boost your credit score at the same time! If you only have a credit card or a revolving line of credit, then this is one of the fastest ways to improve your credit score.
Read on to find out more ways to diversify your credit!
How do I diversify my credit?
To diversify your credit, try to have at least one form of revolving credit and one form of an installment loan. If you can also have an open line of credit, that makes for an even more ideal credit mix. You can rebuild your credit or establish credit faster with a MoneyLion Credit Builder loan, borrow up to $1000 and pay back over 12 months.
1. Credit cards and mortgages
This credit option is simple and straightforward. A credit card is revolving credit while a mortgage is an installment loan. By opening these two lines of credit, you have already built credit diversity.
2. Student loans, credit cards, and utility bills
Utility bills are considered open lines of credit, and on-time payments can be used to boost your credit score. In addition to utility bills, revolving credit in the form of credit cards and installment loans in the form of student loans come together to create an ideal credit mix. This credit mix can be achieved even while still attending college, making it possible for twenty-year-olds. It is never too early to build a good credit mix!
3. Auto loans, store credit cards, and mortgages
This credit mix combines revolving credit in the form of store credit cards and installment loans in the form of an auto loan and a mortgage. When paired together and managed responsibly, this diverse credit portfolio demonstrates diversity and creditworthiness.
4. Store lines of credit and business loans
Even without a credit card, a store line of credit is still a type of revolving credit. Paired with the installment loan in the form of a business loan, a borrower who has a store line of credit and business loans will subsequently have credit diversity, demonstrating this individual’s ability to manage different types of credit.
Diversifying your credit is easy
The key to credit diversity is awareness of the different types of debt and how lenders view them. Understanding the difference between revolving credit, open credit, and installment loans is the first step to learning how to diversify your credit.
However, you don’t have to get a mortgage or another loan in order to diversify your credit. It can be as easy as opening a MoneyLion Credit Builder Plus membership with the types of credit that you already have. MoneyLion is here to help you protect your credit despite any unexpected life event and continue to build a good credit score no matter what.
Frequently Asked Questions
What is the fastest way to build credit?
The fastest way to build credit is to pay all of your bills on time, pay off debt as soon as possible, and dispute any errors on your credit report. You can also ask for a higher credit card limit, open another credit card, or keep all of your credit cards open even after you pay them off.
Can your credit score increase in a month?
Yes, your credit score can increase in a month if you take measures to pay off your debt or diversify your credit.
Is it good to diversify your credit cards?
While diversifying your credit cards won’t improve your credit diversity, it can be advantageous in terms of improving your credit ratio. Many consumers choose to diversify their credit cards to take advantage of the many bonuses offered by different credit cards. Just be sure to pay them off regularly and manage your open credit lines responsibly!