Learn how both can affect your finances
Finances can be confusing. Debt and credit are two aspects of finances that most people deal with at some point in their lives. This article will help you understand what debt mix and a credit mix are and how that information can help you better manage your finances.
Understanding your debt mix and credit mix makes it easier to improve your credit score and opportunities for borrowing.
What is a debt mix?
A personal debt mix refers to the amounts owed across different types of credit accounts, such as credit cards and car loans. Your debt mix focuses on how much debt you owe and to what type of accounts – either secured or unsecured loans.
Secured debt is a loan or credit line that is backed by an asset, like a car or a home.
Secured debt is safer for lenders because, if the borrower stops repaying, the lender can seize the asset. Mortgages and auto loans are examples of secured debt. This means if you stop paying your mortgage, since it is a secured debt, the lender can seize the asset – your house.
“Secured loans are generally less risky for lenders, so consumers may have more lenient credit requirements, and their payment history on these loans may be weighed heavier when determining credit score impact,” said Tara Alderete, Senior Director of Enterprise Learning for MMI, an FCAA member agency.
Unsecured debt is a credit line or loan that does not require an asset to borrow from the lender.
Credit cards, student loans and personal loans are examples of unsecured debt. If you don’t pay your credit card balance, the lender will not seize your lunch or your new purse. However, paying late or not paying at all will result in late fees, a decline in credit score, debt collection and/or legal action.
“Student loans are unique because they are unsecured but are treated like secured debt in a scoring model,” said Becky House, Director of Strategic Initiatives for American Financial Solutions, another FCAA member. “They are evaluated primarily on payment history and the balance-to-loan ratio rather than revolving utilization.”
What is a credit mix?
The types of credit accounts where you owe money make up a credit mix. In a credit mix, debt is classified as revolving or installment credit.
Revolving credit accounts include credit card accounts and home equity lines of credit (HELOC). With revolving accounts, you can borrow varying amounts of money up to a certain limit each month. These accounts typically have no set end date.
Installment credit accounts have fixed payments to be made at set intervals (e.g., monthly) over a set timeframe.
Having and repaying both revolving and installment debt shows lenders that you can manage different types of debt responsibly. According to Experian, “An ideal credit mix includes a variety of both revolving accounts and installment accounts.”
One way lenders evaluate whether you have a good credit mix and debt mix is to look at your FICO score. A FICO score is a three-digit number calculated based on the information in your credit reports.
In a FICO score calculation, 35 percent is based on your payment history. 30 percent comes from amounts owed to lenders. The length of credit history makes up 15 percent of the score, and credit mix and new credit are 10 percent each.
“Credit scoring models also use an algorithm, so the impact of an action could vary by consumer,” said Alderete.
How do you know if you have a healthy debt mix?
“Knowing your debt-to-income (DTI) ratio and what it means is a good place to start,” said Alderete.
To find your debt-to-income ratio, divide your total debt by your total gross income. Total debt includes housing, auto loans, credit cards and student loans. Gross income represents the amount of money you make before taxes and deductions.
“A 36 percent DTI ratio is generally considered reasonable,” said Alderete, but it’s best to aim for an even lower ratio. A lower DTI indicates that you have a better balance of income to debt.
“It’s also important to consider the different types of debt you’re managing and how this contributes to your credit score and overall financial health,” said Alderete. “Your ability to make regular fixed payments on secured loans, like a mortgage or auto loan, could indicate a lower borrowing risk, thereby weighing more heavily in what makes up that 10 percent of your FICO score.”
Does how much unsecured credit you use affect your credit score?
Yes, the amount of your credit limits used on unsecured debt versus secured debt will impact your credit score.
“The distinction between the debt types comes down to volatility versus predictability,” said House.
“Credit utilization primarily tracks revolving debt like credit cards and revolving lines of credit. In a FICO credit score, this accounts for 30 percent of the score. Because people can spend, pay and re-borrow, scoring models view high balances as a red flag for financial over-extension.”
However, House explained, installment loans, such as mortgages and auto loans, are fixed. They move in one direction – down – because balances drop as payments are made.
“Scoring models view these as a sign of stability if payments are made on time. Basically, high utilization on a credit card signals a potential crisis, while a high balance on a new mortgage simply signals a new homeowner,” she said.
Does unsecured debt hurt your credit score more than secured debt?
“It’s not that one type inherently hurts a credit score more,” said House. “It’s how the debt is used.”
The composition of debt mix is important in credit score calculations. Balances on secured loans drop with every payment. The main factor being measured is payment history – the largest part of a credit score.
“With unsecured, revolving credit – like credit cards – scores consider payment history and how much of the available credit is being used,” said House. “High utilization can lower scores even when payments are made on time, making unsecured debt appear more harmful if balances stay high.”
What hurts your credit score more – missing an unsecured credit card payment or a secured mortgage payment?
“Missing payments on any type of debt will hurt payment history and cause a score to drop,” said House. “Late payments on mortgages and credit cards typically cause a significant decrease, which varies depending on the person’s starting score and their overall credit profile.”
House said borrowers with higher starting scores may experience the largest credit score declines. Since their profile contained less negative or risky information before the missed payment, the event indicates the borrower has become riskier and alerts lenders.
“Mortgage delinquencies often trigger sharper declines because housing payments are viewed as highly predictive of financial stability,” said House.
There is also the risk of foreclosure on a home or repossession of a vehicle, which can significantly damage a credit score.
If you cannot pay all of your bills, which should you pay first?
“If you’re unable to pay all of your bills, first assess your financial situation to determine your income and expenses. This puts you in the best position to plan, prioritize and negotiate,” said Alderete.
Then, contact your creditors and service providers to explain your situation and discuss your options. Many creditors have hardship programs available, and they want to help, she shared.
Next, use all available resources to prioritize payments.
“Completing a ‘wants versus needs’ assessment can help you determine which expenses are necessary,” Alderete advised. “Typically, these are expenses for things needed to survive, like rent or mortgage, groceries, transportation to and from work, etc.”
Remember, any missed payment will likely impact your credit score. As you identify options, ask about the impact on your credit score. Also, always get agreements in writing and keep accurate records in case you need to contest fees later.
“If you’re struggling to make payments or have a gap in your monthly budget, reach out to an FCAA member right away,” said Alderete. “It’s never too soon to ask for help and explore your options.”
How does medical debt affect your debt mix and credit score?
“Medical debt is the most ‘forgiven’ type of debt in the credit world because it is involuntary; no one chooses an emergency room visit,” said House. “Newer credit scoring models give less weight to medical bills because they are not a good predictor of how someone will pay their bills.”
Recent legal updates also impact how medical bills appear on credit reports, House shared. These include:
- Removing paid medical bills from credit reports
- Requiring medical facilities and collection agencies to wait one year before reporting an unpaid medical bill to credit reporting agencies, providing time for insurance payments and for the person to explore other repayment options.
- Preventing medical debt under $500 from appearing on a credit report or score
How can a debt management plan help someone rebalance their debt mix?
A debt management plan (DMP) can help stabilize your finances in two ways, according to House.
First, a debt management plan consolidates unsecured debts into a single structured payment.
Second, your credit counselor will work with your creditors to reduce interest rates on accounts. This allows more of each payment to go towards the principal of the debt, helping balances fall faster,” said House.
Debt management plans also help rebuild payment history and immediately begin lowering balances.
“Even though a DMP doesn’t add new types of credit, it strengthens the two areas that matter most in someone’s existing mix: on‑time payments and lower revolving balances,” said House. “Over time, this leads to a credit file that looks more stable and less dependent on high‑risk debt.”
For example, American Financial Services’ client Krysta called in with a credit score of 645 and $80,300 in unsecured debt. After 15 months on a debt management plan, her score rose to 785, and she paid off $26,700.
“This is a clear example of how improving payment history and reducing revolving balances can meaningfully shift someone’s overall debt mix and credit profile,” said House.
Contact an FCAA non-profit credit counselor today to get help with your debt. Call 800-450-1794.