You know all the basics that you’ll need to cover if you want a good Credit Score. But did you know that a good mix of credit is equally important? Read on to find out.
Your Credit Score is a tool that banks use to assess your creditworthiness. They use this to check whether you will be able to repay what they have lent you. When it comes to your Credit Score, there are several factors that affect it. One of them is your credit mix. Credit mix refers to the type of accounts that make up your credit report. A credit mix may include different types of credit accounts like Credit Cards, Home Loans, Personal Loans etc. One thing to note about credit mix is that as a factor it’s far less important for your score than paying your bills on time and keeping your credit utilisation ratio below 40%. Let’s take a look at how credit mix as a factor affects your Credit Score:
Breaking Down Credit Mix:
There are three types of credit accounts:
- Revolving
- Instalment
- Open
Revolving Credit:
One of the most common types of credit accounts, revolving credit is a line of credit that you can borrow from but that which has a cap, known as a credit limit. Credit Cards are typical examples of revolving credit. It usually involves monthly payments and interest charges if you have an outstanding balance.
Instalment Credit:
Instalment credit is a fairly common type of loan that includes taking a fixed amount of money as loan and a recurring repayment schedule. It involves loans like Personal Loans, Car Loans etc.
Open Credit:
Open credit is a rarer form of credit and for a lot of people, it doesn’t even appear on their credit reports. It refers to accounts that you can borrow from up to a maximum amount like a Credit Card but which must be paid back in full each month. It is generally associated with charge cards (not to be confused with Credit Cards used for revolving credit).
Additional Reading: 5 Shocking Ways Your Credit Score Can Affect Your Life
How Do Different Types Of Accounts Affect Your Credit Score?
While credit diversity does influence your Credit Score, what it exactly does to your Credit Score depends on your unique track record with credit. For example, if you and your friend have the same type of credit accounts-say one Credit Card and one Personal Loan each-for the same number of years. But if your friend always makes payments on time whereas you’re often late, your Credit Score will differ a lot. You’ll definitely end up having a lower Credit Score than your friend. Moreover, if both of you take out a Personal Loan and add it to your credit mix, the effect on your scores will be different.
While having a good mix of credit accounts and sticking to your repayment schedule will help show lenders that you’re responsible, one thing to note is that you should apply for additional credit accounts only if you plan on using the credit, not to just beef up your Credit Score.
Additional Reading: 10 Things That Don’t Affect Your Credit Score
How To Apply This To Your Credit?
While having a healthy mix of credit accounts bodes well for your Credit Score, it certainly isn’t enough to maintain or build your Credit Score. Instalment loans, for instance, are easy to manage if you stick to your repayment schedule and pay off your debts every month. One thing to note is that if you’re paying only the minimum due amount every month, you will end up paying interest on the unpaid amount. Over time, your Credit Card debt will only grow and soon, you might find yourself in a debt trap.
Additional Reading: Can Credit Card Companies Reduce Your Credit Limit Without Warning?
When the debt you owe to your credit issuers increase compared to the total amount of credit that is available to you, your credit utilisation takes a hit. Your credit utilisation ratio affects your Credit Score much more than your credit mix. This is why it’s crucial that you keep an eye on your revolving credit accounts. Pay off your Credit Card bills on time and in full, every time and keep your Credit Card balances. This will help to keep your credit utilisation low and boost your Credit Score even more.
If you have a track record of responsibly using only one type of credit product-whether it’s a Credit Card or an Education Loan, it’s likely that you have a good Credit Score. Don’t feel compelled to take on more credit if you don’t actually need the money. But if you want to take your score to the next level, consider adding a different product to your credit mix. For instance, if you have only a Personal Loan, you can opt for a Credit Card that will help you manage your expenses better.
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