What is Credit Mix and How to Boost Your Credit Score?

If you wish to understand how to increase credit score, you must develop an understanding of the various factors that affect credit scores. A borrower’s credit history is the key factor that determines their credit rating. It shows whether a borrower can be trusted with timely repayments or not. A borrower’s credit history accounts for 35% of their credit score. Further, if you want to ​​improve your CIBIL score, you must also reduce your credit utilization ratio to below 30% as one’s credit utilization ratio accounts for 30% of a borrower’s credit score. 15% of a borrower’s credit score depends on one’s length of credit history and 10% depends on the credit mix that one has in their kitty. In this article, we focus on how one can use knowledge about credit mix for CIBIL score increase. 

What is Credit Mix?

In very simple words, credit mix refers to the different types of credit accounts one has. These can include loans, credit cards, mortgages, etc. When it comes to loans, borrowers can avail of two different types of loans – secured and unsecured. Secured loans are backed by collateral and therefore, do not carry much risk for the lender. On the other hand, unsecured loans do not involve collateral or security. Secured loans draw a lower rate of interest than unsecured loans. 

Understanding How a Credit Mix Works 

Simply put, a credit mix refers to the different types of credit you use, such as Home Loans, personal loans, credit cards, or auto loans. 
A healthy credit mix shows lenders that you can manage various forms of borrowing responsibly. Credit is generally divided into two categories. Secured credit includes loans backed by collateral, such as a Home Loan. Unsecured credit covers products like credit cards and personal loans, where no asset is pledged. When your credit profile includes a balanced combination of both, it indicates disciplined credit behaviour. 
Credit bureaus assess how well you handle these different credit types over time. This balance can have a positive impact on your credit score, although it is not the most heavily weighted factor. 

Different Types of Credit Accounts 

Instalment Accounts

Instalment loans are loans that are repaid in the form of instalments. These instalments comprise a principal component and an interest component. Once the loan has been repaid in full, the loan account is closed. Car loans are an example of instalment loans.

Mortgage Accounts

Mortgage loans are quite similar to instalment loans. However, in the case of mortgage loans, the borrower can choose to go with either the fixed rate of interest or the floating rate of interest.

Revolving Debt Accounts

In the case of revolving debt, the borrower borrows only a part of the credit available to them and pays interest on the amount they have borrowed from their credit limit. They can also choose to pay the minimum due amount. However, they should refrain from doing so if they want to increase their credit score. Credit cards are an example of revolving debts.

Also Read Ways to Improve Your Credit Score with a Credit Card

Open Accounts

In the case of credit cards, most of the time, borrowers can repay the minimum due and continue using the card. However, in the case of some credit cards, one must pay the entire balance in full if one wants to be able to continue using the card. The same goes for certain collection accounts. These accounts are known as open accounts.

Lenders offer their best loan deals to borrowers who have a good credit mix. This is because a good credit mix assures lenders of a borrower’s ability to handle all kinds of credit. However, this does not mean that to boost your credit score, you should open different types of loan accounts. However, if you have had different types of loan accounts, do not make the mistake of closing them. Closing an account leads to your loan history being deleted. This is not good for your credit score.

Why is Credit Mix Important for Your Credit Score?

When you have a mix of credit types, it says a lot about your ability and experience to handle various credit instruments. Each credit has a different meaning. A revolving credit indicates your ability to borrow varying amounts of money each month and yet repay it.  

A loan displays your ability to honor a long-term commitment until you have fully repaid the debt.  Such a diverse profile makes the lenders’ decision easier especially when you have displayed discipline in repayment for all the types of debts.  

How to Boost Your CIBIL Score through Credit Mix? 

There’s a famous saying that goes, “Don’t put all your eggs in one basket” which really means don't risk everything on the success of one venture. This also holds true in case of credit – do not put all your stakes on that credit card of yours or the student loan that you took once upon a time in the hope that they alone would pull your credit score. In reality, however, a good credit score is the result of a good credit mix.  

Balance is important in finance and a diverse blend of credit provides a steadiness to your financial waters. CIBIL places a good weightage on credit mix when calculating your credit score. As such, you can diversify your credit accounts into revolving and installment credit. An ideal credit mix should include – a credit card, a loan (Home Loan, personal loan, student loan, etc.).  

Evaluate your credit mix - If you already use a credit card and have a Home Loan on your name – you already have a credit mix. 

Diversify your credit accounts – If you don’t have any active credit line, you may consider applying for a credit card and making a high-ticket purchase such as a vehicle or even a house - using a secured loan.  

Monitor your credit utilisation – When using a credit card, keep a low credit utilisation ratio. This will help you improve your CIBIL score.  

Keep your accounts open – When you have successfully repaid your debts, do not rush to close your loan account. If you have a credit card that has long been unused, do not close it – instead start using it. Vintage accounts add great value and weightage to your credit score. 

Common Credit Mix Mistakes to Avoid

While one takes utmost care to make sure that their credit score and mix are optimum, there are some common pitfalls to take care of. Here’s a list of common mistakes one can make regarding their credit mix:  

Closing credit accounts

An open account contributes more to your credit score than a closed one, even so, closing an account may result in lowered credit score. This is because a closed credit account with a good repayment history would be contributing to your credit score, although the share won’t be as good as a live account. 

Applying for too much credit at once

Each time you apply for a credit, an enquiry is run by the lenders to pull your credit report. This type of enquiry is termed as a hard enquiry and it impacts your credit score. Secondly, applying for too many credits indicates a credit hungry behaviour with the lenders eventually discouraging them to grant you a credit. 

Focusing on one type of credit account

A good credit mix requires you to have a credit card and a secured loan. As such, focus should be divided equally on both these credit sources. 

What is not included in the credit mix? 

A credit mix reflects the different types of credit products you actively use, but not all financial activities are considered part of it. Many regular payments and financial commitments do not contribute to your credit mix, even if they are managed responsibly. 
Savings accounts, fixed deposits, and recurring deposits are excluded because they involve saving money rather than borrowing. Similarly, debit card transactions are not included, as they use your own funds and do not represent credit usage. Routine household payments such as electricity bills, water charges, gas bills, mobile bills, are also not part of the credit mix.  

Does a Lack of Credit Mix Hurt the Credit Score? 

A lack of credit mix does not automatically hurt your credit score, but it can limit how strong your credit profile appears to lenders. Credit mix refers to the variety of credit products you use, such as loans and credit cards. While it is one of the factors considered by credit bureaus, it carries less weight than repayment history or credit utilisation.
If you have only one type of credit, such as a single loan or just a credit card, your score can still remain healthy as long as repayments are made on time. However, a limited credit mix gives lenders less information about how you manage different forms of borrowing. 

Final Words

If you want to boost your credit score, following the above-mentioned tips will certainly help. However, borrowers must know that it is not possible to raise their credit score immediately. If you want to increase your credit score, you must learn to be patient. Learn to practice financial discipline and be disciplined for at least a few months. It will take at least six months for the changes to reflect in your credit report. Follow the tips mentioned above: clear off dues on time, reduce your debt and credit utilization ratio, and maintain a good credit score and credit mix. These things will certainly get better with time.