Your Credit Mix: Why It’s Important to Have Different Types of Credit in Canada

What is a credit mix and why is it important?

Your credit mix refers to all the credit accounts you have (or have had) in your name. Examples of credit accounts include credit cards, personal loans, mortgages, and mobile phone accounts.

Lenders and creditors look at your credit mix because they want to know how you manage different kinds of debt over time. If you always pay off your credit card balance, that shows lenders you can borrow varying amounts and pay it back consistently, while making timely instalment loan payments demonstrates your ability to fulfill a long-term agreement. In short, having a diverse mix of credit—and being responsible with it—can help you achieve a higher credit score.

How does credit mix affect your credit score?

Both of Canada's major credit bureaus—TransUnion and Equifax—consider the types of credit you have when calculating your credit score. Your credit mix accounts for about 10% of your overall credit score, but it is weighted differently depending on the credit scoring model.

It may not seem substantial when compared to the main factors affecting your credit score (payment history at 35% and credit utilization at 30%), but a healthy mix of credit can be very beneficial when it comes to building credit . It can turn a good credit score into a great one, so shouldn’t be overlooked. 

What types of credit are part of your credit mix?

Your credit mix may combine up to four types of credit accounts.

1. Revolving debt

When you think of revolving debt, think of credit cards and lines of credit. It’s when you borrow money up to your credit limit and then repay it over time. Repayment amounts will vary depending on how much money you borrow every month. Once you pay off the amount, you’re free to borrow it again up to a predetermined limit.

2. Instalment loan

An instalment loan, such as an auto loan and personal loan, is a lump sum provided to a borrower and repaid with regular payments (plus interest) over a set period of time until that sum of money is fully repaid. Payment amounts usually stay the same. For example, if you sign up for a car loan of $10,000 and agree to pay it back over five years, your monthly payment will be about $200 per month until the end of your loan term.

3. Mortgage

A mortgage is a kind of instalment loan used to finance real estate. You can choose between fixed or variable interest rates, which is usually not an option offered by other types of instalment loans.

4. Open accounts

Open accounts refer to services you get billed for at the end of a payment period. Contract-based smartphone plans are the most common type of open account.

What types of credit are not considered a part of your credit mix?

Not only are payday loans and title loans extremely high risk, but they also aren’t reported to credit bureaus. It means that even if you make all your payments on time, these loan products won’t have a positive effect on your credit score. On the other hand, if you default on the loan, it can ruin your credit as a collection agency can have it added to your credit report.

What's considered a healthy credit mix?

A healthy credit mix is a diverse one. For example, someone who successfully manages a personal loan, mortgage, and credit card has a healthier credit mix compared to someone who only has multiple credit cards and no other credit products on file. 

If you want to build your credit and you only have instalment loans on file with the credit bureaus, consider getting approved for an unsecured or secured credit card. On the other hand, if you only have credit cards, consider diversifying your credit mix by adding an instalment product such as a personal loan or auto loan. If you find it challenging to get approved for these types of loan products, there are online credit-building programs like The Foundation which approves 100% of applicants.

The Foundation gets set up as a tradeline on your credit file and makes it easy for any Canadian to build credit with small bi-weekly payments over 12 months. The major of The Foundation is how it impacts your payment history. Since every payment is reported to the major credit bureaus, you’ll see your credit score increase as long as you make all payments on time.

Be selective with new credit

Being responsible with a variety of credit products can boost your credit score, but that doesn’t mean you should open as many credit accounts as possible. Applying for lots of different credit products in a short space of time can damage your credit score so take your time and be selective of the products you sign up for. 

You should also think twice before closing accounts as it can impact your credit utilization and credit history. For example, closing a credit card account isn't the best path to a better credit score. Instead, keep the account open and make minimal purchases with that card, and pay the balance often. The best way to maintain a healthy credit mix is to keep accounts open and use them occasionally.

Get to know your credit mix 

If you’d like to check the details of your credit mix, you can download your credit report for free. Simply sign up with Borrowell in under 5 minutes and you’ll be able to see your credit score along with a list of all the open and closed credit accounts that you have on file.

Borrowell conducts soft credit inquiries, which means using the service won’t harm your credit score or show up on your credit report.