The credit score, more specifically the FICO score, is made up of five factors.
Let’s breakdown factor number five, credit mix or we can kind of just think of this as the type of debt that you take on. This factor makes up about ten percent of your overall score and the credit score formula rewards you for having two types of debt, revolving and instalment debt.
Revolving debt mainly comes from things like credit cards. And think of it kind of like a revolving door, you're barrowing money, it's going out and you’re paying it off, it's coming back into the bank, it's kind of revolving back and forth, it never ends, there is no end in sight.
You can use it for as long as you keep your card. The one thing to keep in mind though is that not all revolving debt is treated equally. Credit cards issued by banks are referred to as bank cards, these would be your Visa's, MasterCard’s, and American Express. These cards can be used anywhere, they're looked at more favorably than like, for example, a department store credit card.
Now on to instalment debt. This includes things like auto loans and mortgages. This type of debt is typically taken out for a specific amount and period of time. And then you make your payments back in set instalments, that's where the name comes from. The credit score formula rewards you for having both types of these debts and it just provides an example of you being able to handle multiple types of debts responsibly. And I don't want you to think you should go out and take on a new auto loan or credit card in effort to boost your credit score, because you don't have one of those types of debt.
Remember this only makes up about ten percent of your overall score, so any impact will be minor. In 2020 I actually paid off my car, it was a big moment, I was really excited, and then I went to check my credit and its fell by 20 points and this is the exact opposite of what I thought was going to happen.
And this happened though because I no longer had an active instalment loan. But here's the thing, don't be fearful of this because my score went up right back to where it was after a few months.
Don't stress about this particular area of your credit score, its overall impact is minor.