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What is Credit Mix? How Does it Impact Your Credit Score?

What's Your Credit-mix

What is a Credit Score?

A credit score is a measure to check the ability of an individual to pay back the loan amount that he has borrowed from the bank or any Financial institution. It shows the creditworthiness and repayment capacity of the customer. It is a three-digit numeric representation calculated basis on the details shared by the banks to Credit Information Companies (Transunion, Equifax, Experian).

Each agency has a different model of calculating the credit score, as the information shared by the banks is a little bit different from one agency to the other. The difference is very minimal, but this score helps them to make a decision whether your loan application will be approved or not, what interest you will get.

The credit score is very dynamic in nature and it can change negatively or positively depending on how much credit you have from the bank and how you maintain that in repaying.

Credit scores depend on various factors like payment history, credit utilization, lines of credit you have open, length of your credit history and number of enquiries you have in your credit report for new credit. All these details are analyzed based on the Credit Information Companies algorithms and that produce your credit score.

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Credit Mix

Credit mix is a less known term to the customer, but it is the most important factor in the credit report. It accounts for 10% of your credit score report.

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Credit mix is a comprehensive report of a consumer that shows which kind of credit you have and how successfully you have been maintaining them. It helps the lender in evaluating your loan application whether your application should get approved or not, whether you would be able to repay the borrowed amount in the provided time or not and at the given rate of interest.

It is a blend of different types of credit accounts like mortgages, loans, credit cards, etc. It’s not necessary to have every line of credit in your account, but in case if you have an only credit card in your credit report, then you might consider taking a short personal loan to just a mix of both revolving and instalment credit.

It also impacts your credit score, the basis on types of credit lines you have taken from the Bank/ NBFCs.

What are the types of Credit in Credit Mix?

Generally, there are two types of credit in your credit mix – Installment Credit and Revolving Credit.

It means that you have a combination of credit, one that is fixed and the other one revolves basis on your consumption of the available limit.

Instalment Credit:- In instalment credit, there is a set amount to be paid on monthly basis on a set date within a stipulated time by your bank/NBFC. You cannot use this credit once it is paid off. It is always considered to have a good credit mix as it helps in boosting your credit score, assuming all the payments being made on time.

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It usually involves mortgages, student loans, Home Loans, Personal Loans, Auto Loans, etc.

Revolving Credit:- You can use revolving credit again and again to the extent your credit line allows you to use. You cannot use more than your available limit and make sure that you make your payments on time. Credit card is the best example of revolving credit. In Credit card, you are being provided with a limit to use. Once you make the payment of the used credit, your original limit will again be available for use.

What is not included in Credit Mix?

Not every type of credit is included in Credit Mix, for example, Title Loans and Payday Loans.

Title Loans is basically a secured loan when a borrower takes a loan against their vehicle and the title of their vehicle (Car, two-wheeler) as collateral. These are short term loans taken on the high rate of interest. In case a borrower defaults on the loan payment, the Bank has the right to repossess the vehicle that has been used as collateral and sell it repay the outstanding amount.

Payday Loans are incredibly expensive and short- term loans and easier to get one in comparison to Personal Loans. You might get only two weeks to pay off the amount borrowed. They come with a three-digit rate of interest that can easily make one fall one into the debt cycle.

Title Loans and Payday Loans might not be recorded in the credit report, but it may affect the credit score if you default in the payments of these loans.

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How Does a Good Credit Mix Help in Boosting your Credit Score?

A good credit mix is often considered when you have both instalment and revolving credit. For example, you have a credit card, a personal loan and an Auto loan running in your name. And you are making your monthly fixed payments on your instalment credits, and utilizing the credit card under the stipulated ratio of utilization that is 30%, though you can use more that is not ideal and can be a risk factor for your profile in future.

So, if you are using a credit card, it should be properly used and given the payments have been made on time, can help to boost your credit score. And it will also let the lender see and be assured that how well you have been handling your credit accounts. It will build trust in lender’s eye and hence they will report good credit behaviour to Credit agencies hence this will help the credit agency in analyzing your credit report and will also provide you a detailed report detailing the way you have handled your credit accounts.

To maintain a healthy credit score, you must keep checking your credit to keep a track on your credit records. You should always have basic knowledge about what your credit score is before applying for any kind of loan. You can always check your free Cibil score and keep track of your records.

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