A Story About the Credit Mix

the credit mix

Our China Friend

On our first day in China, in the Shanghai airport, we met our very first “China friend”.
As a remote employee, he moved to China to learn Mandarin and to explore more of the country. Over the first few weeks in China we shared similar interest and “survival tips” in a new country. Fast forward 15 months, and we still hangout out with Mike regularly.
Last night, we had dinner with Mike and caught up on everything from our future travel plans to our most interesting interactions with people in China. This went on for about an hour until Mike said “Hey did I ever tell you how I got declined for 2 credit cards?”. My ears perked up.

I was quite surprised and confused, because before this, I thought of Mike as a responsible guy. At the least, someone who credit lenders would’ve deemed as “credit worthy”.
He went on to tell me that he heard about a new credit card, from another friend, and he loved the “perks” [cash back rewards, no international fees, sign up bonuses etc. ].

Declined

He went through the process to apply for this new card, and  was instantly DECLINED. Mike was shocked! He had paid off all of his student loans and had no other debt. He didn’t even need the card, because he was just signing up for the “reward” benefits.
Mike continued to explain that he is someone who had never paid much attention to his credit score until this point, mainly because he had no need to. When he lived in the U.S. he didn’t have an auto loan or mortgage. The only other debt he ever had was his student loans and a small credit card. Fortunately he paid the student loans off years ago and he NEVER carried a balance on the credit card. He continued to say that he had a relatively high net worth.
It turns out that the reason he was declined was because he didn’t have enough open accounts on his credit report. Which makes no sense to me. I don’t understand why the amount of open accounts would matter to credit lenders. Shouldn’t the amount of assets, or your Net-worth matter more than open debt accounts?
Also, could credit lenders be leveraging the work of other credit lenders as a way to select its debtors? Then it dawned on me that the credit lender wasn’t using anything but his credit score to filter their candidates. The credit score is the real problem, not the credit lenders selection process.

The Credit Mix

I did some research and the factor that Mike was declined for was the  “Credit Mix”.

Here is a quote from the Experian Website:
” Credit mix—or the diversity of your credit accounts—is one of the most common factors used to calculate your credit scores. It is also one of the most overlooked by consumers. Maintaining different types of credit accounts, such as a mortgage, personal loan and credit card, shows lenders you can manage different types of debt at the same time. It also helps them get a clearer image of your finances and ability to pay back debt.”
So according to Experian the credit Mix is a measure of how well you can manage different types of debt simultaneously. Which seems like a fair assumption to me. If you have many debt accounts in good standing then you could assume someone could handle the weight of one more.

What is a Debt Manager?

Credit lenders really want candidates who can manage debt well. Well… Excuse me! I made the mistake of thinking that credit card lenders wanted candidates who could manage wealth and money well. Which must be an assumption many people [including me] make.
We think that the credit score is a measure of wealth, when in reality it is a measure of how well you manage debt. Definitely NOT the same thing. With this logic you could be a billionaire who holds no debt and not even qualify for a simple credit card!
The only reason I could imagine that a credit lender would want someone who manages debt and not wealth is because they don’t make much money off of someone who only manages wealth well.
I think this way of thinking is ridiculous and should be reminder to us all to AVOID credit cards at all cost. It completely contradicts the “you need a credit card” culture that assumes that credit lenders are doing us a favor by letting us borrow their money at 20% interest.
If you would have anything to add to this article please drop it in the comments below. Thank you for taking the time to read this post.

2 thoughts on “A Story About the Credit Mix”

  1. We have no debt of any kind, we do have a few credit cards but in 40 years we’ve never failed to pay them completely off each month. Our credit score is always over 800, usually about 820. Running a balance on a credit card never increases your score, ever.

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