The moment we talk about credit or loans, we are bound to touch upon the topic of CIBIL scores or credit scores. This three-digit magical number can make all the difference between being accepted or rejected for availing any kind of credit. A lot is usually heard about the ideal credit score range and how one may maintain it right. However, not everyone is aware of what makes up their CIBIL score and how each component might affect the rating.
What is Credit Mix?
Credit mix is one of the five main factors that help in building your CIBIL score. It is a measure of your credit worth based on the types of existing credit lines. There are different kinds of credit accounts but credit mix is normally determined by the two important categories mentioned below:
- Revolving credit
- Instalment loans
Revolving credit mainly comprises credit cards. It may also include other forms of revolving accounts such as store credit lines, virtual credit cards and Home Equity Line of Credit or HELOC. This type of credit lets you continue charging against the account as long as you stay below the specified credit limit and make regular payments.
Instalment loans are loans with a fixed amount and consistent repayment plan. Some examples include student loans, car loans, mortgages, personal loans or credit-builder loans. Basically, if you have borrowed a specific sum of money and are now repaying it in smaller portions through monthly instalments, it is referred to as an instalment loan.
How to Improve Your Credit Mix?
A balance of the two types of credit accounts defines your credit mix. There is no ideal credit mix or fixed number of credit accounts that may be accurately deemed too many or too few. Hence, it is best to have a minimum of one revolving account and one instalment account open.
Market experts recommend selecting the appropriate line of action from any of the following ways to improve your credit mix after assessing the open credit lines:
1. Take up a Credit Card
Individuals who are fairly new to credit usage may have a thin credit file containing fewer open accounts over a short duration. In such a situation, despite making routine payments in full, you may not have sufficient information in your file to generate a credit rating, leaving you with a low CIBIL score.
Now, if your existing credit consists of loans like a car loan, personal loan, etc., you may consider opening a credit card, which is a revolving credit account, to improve the credit mix. Having a thin credit file may render you ineligible for certain credit cards. So, avoid applying for them to avoid rejection that can further hurt your credit score. Instead, opt for secured credit cards, income-based credit products or credit-building debit cards. It definitely helps your score if you are an authorised user on someone else’s credit card but having a card in your own name may wager a bigger boost.
2. Avail of a Loan
Paying off a loan shows lenders that you have responsible credit habits. But once you complete the repayment, the account ceases to be factored into the credit mix. In that case, if credit card accounts are all you have, go in for a debt consolidation loan or make payment plan purchases provided the interest rate is affordable. You can also take up a credit builder loan if you cannot qualify for a normal loan due to poor credit scores. Steer clear of securing title loans and payday loans as they have a very high rate of interest and do not get reported to credit bureaus unless they reach collections due to missed payments.
3. Keep Existing Accounts Open
When you have just one ongoing instalment account, paying it off before the end of your scheduled tenor could hurt your credit score, especially if you are planning to take up another loan or mortgage soon.
Similarly, if you wish to close a credit card account simply because it incurs higher fees or due to non-usage, remember that closing revolving accounts can reduce your score if you only have a couple of them, to begin with. It will also decrease the length of your credit history and add to your credit utilisation rate. Therefore, if you don’t use the card and there are no associated charges, try to retain it. And if it attracts hefty fees, look for alternatives to move the current account to another card that might fetch you zero to nominal fees.
How Credit Mix Affects Your Credit Score
Your CIBIL score is calculated using the following factors giving each one a different weightage:
- Payment history – 35%
- Credit utilisation – 30%
- Length of credit history – 15%
- Credit mix – 10%
- New credit – 10%
It is obvious from the breakup listed above that credit mix does not comprise a significant portion of your credit score although it is substantial and cannot be given a miss. Maintaining a good balance of different credit types strengthens the credit mix and thereby your score. Conversely, holding fewer accounts or just one kind of account or even unnecessary account closures may damage the credit mix.
What is a Good Credit Mix?
It is always a good idea to diversify but you don’t necessarily require each type of credit line to be open. Ideally, you may opt for one instalment loan account and two or more revolving accounts. This will ensure a good mix of credit types and also shield you from a score drop when you close an account.
For instance, your portfolio could have a combination of credit types as follows:
- 1 student loan
- 1 car loan
- 2 credit cards
What is a Bad Credit Mix?
Irrespective of payment regularity and number of credit lines, holding just one credit type - either revolving accounts or instalment accounts - may prove detrimental to the credit mix.
Having fewer accounts open might not be ideal either. For example, if you have one loan and one credit card, that’s a good start, but it might not be enough to enhance your credit score as per expectations.
All things considered, the building blocks for achieving strong credit broadly remain the same: timely payments by the due date, using credit only when needed and maintaining a low balance on your revolving account. Nonetheless, a diverse credit mix improves your credit score because it tells lenders that you are capable of handling different types of credit while the right balance indicates its effective use and understanding.
Individuals who are just starting out and need to build credit must aim for a balanced credit mix to reach their desired scores. Credit mix may be a relatively smaller part of credit score calculations but it can go a long way in enhancing your overall credit profile.
