What's Considered a Healthy Credit Mix?

Having a good credit score is paramount to your financial health. Not only does it increase your chances of availing a loan, but it also helps in acquiring favourable rates and terms. Maintaining the right range of credit ratings is always advisable; and in case of a credit fall, individuals need to work on enhancing their credit scores before they can apply for future credits. Therefore, it is important to understand the multiple factors that go into calculating your credit score, one of which is the credit mix. 

Credit is one of the determinants of your credit score. A sound credit mix denotes a strong financial profile and can impact your score significantly. Let’s see how. 

Understanding Your Credit Score

CIBIL scores, commonly known as credit scores, are three-digit numerals ranging between 300 to 900. They provide a snapshot of your credit history and portray your credit behaviour. Scores closer to 300 are considered unfavourable for availing credit because they reflect unreliable credit habits. On the other hand, 900 is the highest credit score reflecting responsible credit behaviour. Such individuals find it easier to obtain credit at attractive interest rates and conditions. Lenders typically extend favourable loan terms to applicants with CIBIL scores of 750 or above. 

These scores are provided by credit bureaus in India such as TransUnion CIBIL, Experian, CRIF High Mark and Equifax. They receive financial data pertaining to every individual who has ever availed of credit from different banks and financial institutions around the country. Credit bureaus store these records and access them when necessary to create a detailed credit report. Then, they assign it a credit score or CIBIL score which serves as a numeric credit summary.  

What is Credit Mix?

A diverse mix of credit benefits your CIBIL score. Credit mix refers to the credit accounts - the number of secured and unsecured loans - you currently hold. Secured loans are obtained by pledging high-value collateral like real estate, gold, fixed deposits, investments, or other securities. Prime examples are Home Loans and Loans Against Property. Unsecured loans, on the other hand, do not require collateral, which is why, they come with more credit risks and higher interest rates such as a personal loan, business loan, or education loan.  

Parameters Used to Calculate Credit Score

Credit bureaus will calculate your credit score based on the following parameters: 

• Payment history (35%) – This determines how consistently one pays their outstanding dues. Your payment history forms a sizeable part of your credit score. If you have always been regular in bill payments, you have nothing to worry about. 
• Credit utilisation (30%) – Credit usage in relation to the given limit is your credit utilisation ratio. Try to curtail spending up to 30%; anything beyond that may harm your score. 
• Credit history period (15%) – This refers to the duration of your old accounts. Your score receives a boost if you have active accounts that show timely payments spanning longer years. 
• New credit (10%) – Availing a number of credit or loans within a short time frame can decrease your credit score as it denotes over-reliance on credit. Hence, avail of loans only when necessary. 
• Credit mix (10%) – Credit mix refers to the different types of credit accounts you have open and how well you manage them thereby impacting your credit ratings. 

What are the Two Types of Credit Accounts?

Credit accounts fall under two categories. These are: 

• Instalment loans – In instalment loans, you borrow a specific amount and repay it through a series of smaller payments for a stipulated period of time. Examples include mortgages, personal loans, and so on. 
• Revolving credit – Here you don’t borrow funds. In revolving credit, one uses credit in line with the limit accorded to them and pays it back each month, either as the minimum amount due or the full balance. Credit cards and home equity lines of credit are the main examples.   

What is a Healthy Credit Mix? 

A healthy credit mix comprises both instalment and revolving accounts, signalling a proper understanding of credit and its optimum utilisation. It can elevate your credit score and your financial portfolio. Diversity in credit is always recommended but that doesn’t imply you need to dip into each credit type. You could consider one instalment account and a couple of revolving accounts to get a good mix. For example, you could go in for one education loan, one auto loan, and two credit cards.  

If you have only four credit cards and no existing loans, it might have a negative impact on your credit score. In such a situation, do not take a loan just to improve your credit score. If you have been making regular payments and managing your credit card usage well, you can maintain a good credit score even without having a variety of different types of credit.

However, if that's not the case and you find yourself carrying a balance on your credit cards from one month to the next, applying for a personal loan to help manage your debt might be a good option. Personal loan interest rates are likely to be lower than the charges on your credit card. You can also use some of the loaned funds to cover expenses that you would typically put on your credit card.

Read Also: What is Credit Mix and How to Boost Your Credit Score? 

Should I Worry About My Credit Mix?

A good credit mix can protect you from a sudden fall in CIBIL scores usually brought about by account closures. It must be noted that despite regular payments and the ideal number of credit lines, having just one type of credit, whether revolving or instalment, can hurt your credit mix. So, one loan and one credit card may display diversity but it might not hold true to expectations if you want to enhance your credit score.  

Nevertheless, all things considered, it may be difficult to possess the right mix of credit accounts. Thus, if you have a high credit score, take it easy and focus on these basic aspects instead: 

• Pay the bills or dues on time 
• Avoid running high on your credit card tab 
• Maintain long-term accounts  
• Avoid applying for too many credit accounts at once 

Summing Up

Your credit score is an indicator of financial wellness; and a healthy credit mix is one of the factors, which helps in adding up the score. Hence, whether you have already availed of credit or intend to take one up, keep track of your credit report and learn how to read it right. There may be variations in the types of credit scores depending on which credit bureau generates it. Maintaining a low credit score utilisation and paying bills on time, among other best practices, always works in your favour as it qualifies you to receive the best credit deals in the market.