If you’ve been researching how to improve your credit scores, you may already know that your mix of credit accounts is one of five key factors that affects your credit scores. If you aren’t familiar with that fact, it simply means that, to achieve the highest possible credit scores, you generally need more than just credit card accounts. An auto loan, student loan, personal loan or even a mortgage can help round out your credit file and, if you’re making your payments on time and aren’t carrying too much debt, help take your scores to the next level.
So if more accounts mean a better score, it might stand to reason that the more you borrow for that car loan, mortgage or personal loan, the better your credit scores will be, right? Not necessarily so, according to John C. Heath, a credit expert and consumer attorney for Lexington Law, which is affiliated with Credit.com.
“Whether the loan benefits the consumer is relative to that consumer,” Heath said. It depends on various factors, including how much debt you’re carrying compared to credit available to you.
“For example, Consumer A has a home loan for $100,000. She does not carry other credit balances and has remaining credit available to her in the amount of $200,000. Consumer B carries a home loan of $500,000. He has [a] credit card balance and a car loan that total an additional $75,000 and has remaining credit available in the amount of $100,000,” Heath said in an email. “Consumer A would most likely be in a better position with her credit score because she has used only 30% of her available credit. Consumer B on the other hand, has used approximately 85% of his available credit. His credit score will most likely be lower.”
That’s because, while mix of account counts towards 10% of most credit scoring models, the amount you currently owe your creditors makes up about 30%, and keeping those amounts low relative to your available credit is important. So, if you qualify for a $30,000 car loan, but you can put down $10,000 cash, that car loan is still going to improve your mix of credit accounts, but a higher loan amount won’t have a positive effect.
In fact, the lower loan amount and related lower monthly payment could help ensure you don’t overextend yourself and your ability to make all of your payments on time. (And payment history, remember, is the most important aspect of credit scores, accounting for 35% in most scoring models.)
“You can improve your credit score by keeping an eye on the amount of credit you have in use,” Heath said. “A good rule of thumb is to utilize about 30% of your available credit in order to optimize your credit score.”
Of course, you can strive to keep it even lower. Below 10% can be optimal if you want to improve your credit scores more quickly.
Remember, if you’re trying to improve your scores, especially if you want to do so quickly, your exact point increases will vary depending on your full credit profile. Still, you may be able to give yourself a boost by paying down high credit card balances and/or disputing errors on your credit reports. Plus, you can build good credit in the long-term by paying all your bills on time, keeping debt levels low, limiting new credit inquiries and adding that mix of accounts only as your score and your wallet can handle them.