When it comes to investments, it’s wise to diversify your portfolio. This may mean investing in different industries and businesses, as well as holding a variety of investment vehicles. This in turn can benefit your finances by ensuring that if one industry or one type of investment sees declines, your overall portfolio remains protected.
The same logic can be applied to your credit scores. That’s because the concept of credit mix is 10 percent of the formula used to calculate your credit score.
Lenders use this equation to determine your risk to them as a borrower. Thus, the more you diversify what you owe and where you owe it, the better your chances are that lenders could consider you a good investment.
“If all you have is an auto loan and three credit cards, paying off the car will leave you with nothing but revolving credit,” Tim Chen, CEO of the credit-card search website NerdWallet, told CNBC.
Having a variety of auto loans, mortgage debt, and credit cards can be crucial in building a respectable credit history, CNBC reports. Conversely, only holding debt in certain areas, or paying off specific loans entirely while allowing others to grow, can cause lenders to view you as a risky investment.
Even though 10 percent of a credit score calculation may not seem like much, it can be enough to determine whether you secure better interest rates and thereby save money over time.
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