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‘Credit mix’ refers to various credit types in your financial portfolio, such as credit cards, as well as secured and unsecured loans. It is essential to aim for a balanced mix of credit products to demonstrate creditworthiness and improve the overall credit profile. A diverse credit portfolio with balanced accounts showcases responsible financial management and increases your loan eligibility.

Different Types of Credit Available for Borrowers

To build a strong credit score using different types of credit, you need to be aware of all the various credit options available to you. These are as follows:

1. Revolving Credit

Revolving credit, like credit cards or home equity, allows users to make multiple withdrawals from the sanctioned pre-approved amount. Users can keep borrowing until they have used up the credit available to them. Under this facility, they are required to pay monthly instalments and are charged interest only on the amount used. 

2. Instalment Credit

Instalment credit involves various loans with fixed repayment tenures and regular instalment amounts. Over time, the principal loan reduces with each paid instalment. Home loans, car loans, education loans, and personal loans fall under this category.

3. Open Credit

Open credit requires full payment by a fixed date, unlike instalments. All due amounts must be settled by the end of each period. Credit cards fall under this category.

How Can a Good Credit Mix Help Your Credit Score?

A diverse credit portfolio positively impacts your credit score in the following ways:

  • Boosts Credit Score

Having a mix of different credit types, like loans and credit cards, positively influences your credit score

  • Demonstrates Financial Responsibility

A varied credit portfolio showcases responsible financial management, strengthening your creditworthiness

  • Creates Favourable Lender Perception

Lenders view a well-balanced credit portfolio positively, increasing the likelihood of favourable lending decisions

  • Improve Financial Standing

Aim for a diverse credit portfolio to enhance your credit score and improve your financial standing with institutions

Does a Poor Credit Mix Hurt Your Credit Score?

A poor mix of credit, with limited or similar credit types, is one of the key factors that affect your credit score adversely. Below are some points: 

  • Reflects Limited Financial Management 

Limited variety in credit types may suggest a lack of diverse financial management, potentially lowering your creditworthiness

  • Concerns Lenders 

Lenders may view a poor credit profile unfavourably, as it raises concerns about your ability to manage different credit responsibilities

  • Potential Impact on Credit Approval 

A weak credit mix may affect credit approval and interest rates, making it crucial to diversify your credit portfolio for a healthier financial profile

Diversifying your credit portfolio can improve your credit score and creditworthiness, thus creating a positive impression on lenders. Conversely, having a poor portfolio can raise concerns and negatively impact your credit approval. Therefore, it is crucial to strike the right balance and manage various credit types responsibly to maintain a strong credit score.

FAQs on Credit Mix and Its Effect on Credit Score

Why does a poor mix of credit affect my credit score?

Diversifying credit types showcases financial responsibility, positively impacting your creditworthiness.

How can I improve my credit mix in India?

Incorporate different credit types, such as loans and credit cards, to create a well-rounded credit portfolio.

Does a poor credit mix affect loan approval?

Yes, limited or similar options in your credit profile may raise concerns for lenders, potentially affecting loan approval.

Can I check my credit mix's impact on my score?

Regularly review your credit report to assess and identify areas for improvement.

Are there specific credit types I should prioritise?

Prioritise a mix of instalment and revolving credit, like loans and credit cards, for a balanced credit portfolio.

How often should I reassess my credit mix strategy?

Reevaluate your credit portfolio periodically, especially before significant financial decisions, to ensure optimal creditworthiness.

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