Your credit score influences your credit card applications and loan interest rates. The credit bureaus consider different factors to calculate the score. These factors include payment history, credit utilisation ratio, credit mix and more, which all carry different weights. Credit mix is one of the most important factors that carries a 10% weightage. In this blog, we'll discuss what is credit mix is and its role in credit request approvals.
What is Credit Mix?
Credit mix refers to the different types of credit accounts a borrower has. It primarily shows lenders and creditors how you have handled the different types of credit accounts over time. It includes personal loans, business loans, home loans, credit cards, mortgage accounts and more.
Depending on the credit scoring model in use, a credit mix can have different effects on your credit scores. It's one element that's typically considered when determining your credit score.
What Are the Main Types of Credit Mix?
Here are the main types of credit mix that a credit bureaus consider for credit score calculation:
1. Secured Credit
Secured credit is a loan secured by assets that can be used as collateral, such as property, vehicles or gold. This collateral reduces the lender’s risks of lending. It usually reflects better interest rates and terms. Typical examples of secured credit are:
● Home loan - Secured against your property, where it is used as security until the debt is paid off.
● Auto Loan - Secured against the car or vehicle, in which the lender shares a partial ownership.
● Gold Loan - secured against physical gold.
● Loan Against Property - a financing facility where you secure a loan by pledging your real estate property.
2. Unsecured Credit
Unsecured credit refers to a loan approved without any security. This loan is approved based on your income, credit history and your ability to repay. Examples include:
● Personal Loan - Sanctioned depending on your creditworthiness and repayment capacity without collateral.
● Credit card - A revolving line of credit that has a limit, and you can purchase items and pay monthly.
● Consumer Durable Loan - Financing that is taken to buy electronics, appliances or other products and paid back in instalments.
3. Revolving Credit
Revolving credit is a form of borrowing where you can reuse the money that is available to you up to a certain limit, provided you are repaying it. Your credit limit is restored whenever you reduce your balance by repaying. Examples include:
● Credit Cards – They provide flexible borrowing where amounts can be repaid in a set cycle.
● Overdraft facility - It allows you to take more money than you have in your account, and you pay interest on the amount you draw.
4. Instalment Credit
This consists of loans that you pay back in regular monthly instalments (EMIs) over a specified period. These include home loans, personal loans, vehicle loans, education loans, and gold loans. You borrow a lump sum amount and promise to pay it back in the form of regular monthly payments.
Why is Credit Mix Important?
Credit mix is one of the five most important factors that credit bureaus consider when determining your credit score. Here are the factors that affect your credit score and how much they affect it:
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Credit mix in the credit score carries 10% of the weight. Even though it's not the largest factor, it's still significant, particularly if you're aiming for a good score.
How Does Credit Mix Affect Your Credit Score?
A good credit mix can be the missing link if you want to increase your credit score. Although it only accounts for about 10% of your score, that 10% can make all the difference, particularly when you're trying to get your credit score to be higher. Here's why credit mix helps:
1. Indicates Well-balanced Financial Behaviour
Lenders want to be aware of how you manage various types of credit. If you manage credit cards (revolving credit) and loans (instalment credit) well, you're proving that you can manage money responsibly in various situations. Whether you pay fixed EMIs or card bills every month, the credit mix proves that you are a reliable borrower.
2. Lowers Perceived Risk
Suppose you've never used anything but a credit card. To a lender, you might still be a "high-risk" borrower since you've never had experience with long-term payment agreements such as personal loans. However, with a healthy combination of credit accounts in your report, such perceived risk is reduced, and the lender feels more confident about extending credit to you.
3. Enhances Overall Credit Profile
Even if you miss a payment once, a mix of diverse credits can cushion the impact. Why? Having multiple different credit accounts demonstrates responsibility and reliability, preventing score fluctuations.
4. Boosts Other Credit Factors
A healthy credit mix generally implies that you also have a long credit history, which works to your advantage when applying for loans. For instance, if you had a home loan five years ago and continue to own a credit card you got three years ago, your average credit history improves even further, which helps increase your score.
What if You Don't Have a Credit Mix?
Let's say you've only ever used credit cards. Or you've only taken out a Personal Loan once and never used a card. Here's how credit mix impacts credit score:
● Your credit score may still be good, but it could be harder to reach the highest range.
● Lenders may see your profile as limited or risky, since you've only proven your ability to manage one kind of credit.
● You might not be eligible for favourable interest rates or large loans because you lack diversity in your credit utilisation.
Technically, not having much credit mix isn't the same as having a poor credit record.
Tips to Improve Your Credit Mix
Improving your credit mix needs a strategy that doesn't affect your finances. The key is to bring in diversity deliberately, without over-borrowing or adding unnecessary debt.
1. Start Small with a Credit Card
If you've only had loans and never had a credit card, get a credit card. Get a straightforward, low-limit credit card and use it on regular purchases, like meals or utilities and pay it off in full each month. This adds revolving credit to your report without incurring the interest cost.
2. Use BNPL or Consumer Durable Loans Wisely
Buy Now, Pay Later (BNPL) and small consumer durable loans (such as no-cost EMI for gadgets) are also types of instalment credit. Using them diligently and repaying them on time can add variety to your credit mix without requiring huge financial commitments.
3. Keep Your Old Credit Accounts
An old loan account or credit card with a solid payment history is worth keeping. Do not close it unless there is no other choice. These accounts are beneficial to your credit mix and the length of your payment history.
To Conclude
The importance of credit mix in a credit score cannot be overstated, as it directly affects the score. The lower your score, the higher the chance of credit request rejection and high-interest rates. The higher your credit score, the more access you get to financing with favourable terms. This is why you must always maintain a good credit mix. Taking a Personal Loan is one of the fastest ways to diversify your credit mix. If you want to apply for a Personal Loan to cover your urgent needs, you can consider Poonawalla Fincorp for loans of up to ₹50 lakh at an interest starting at just 9.99% p.a.
Frequently Asked Questions
1. Will my credit mix be better if I use a second credit card?
Yes, adding a second card can improve your credit mix. However, you must also consider adding loans and mortgages for a strong credit mix in your credit score.
2. Is a Buy Now, Pay Later (BNPL) plan counted as part of my credit mix?
Not as of now, but it might happen in the near future because FICO will start adding BNPL to the credit score from late 2025. This is why you can make use of both as well to build your credit score.
3. Will closing an old credit card negatively impact my credit mix?
Yes, closing an old credit card can impact your credit mix for two reasons: reduced credit diversity and shortened credit history.
4. How soon does the opening of a new type of credit influence my credit score?
It normally takes 30–60 days for the new account to get registered with the credit bureau.
5. Is having only secured loans enough for a healthy credit mix?
No. Having unsecured credit, such as a credit card or personal loan, demonstrates you can handle varying levels of risk.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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