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How Different Types of Credit Can Boost Your credit Score?

Most of the financial institutions check your credit score whenever you apply for a loan. Your CIBIL score provides a fair indication to the financial institution about your creditworthiness and repayment ability. As a result, if you have a good credit score, lenders will view you as a low-risk borrower and quickly approve your loan application.

Furthermore, a good credit score will assist you in obtaining a higher loan amount at a lower interest rate. On the other hand, a poor credit score can reduce the chances of your loan approval. In general, there are several parameters that affect your CIBIL score. Among them one such important parameter is your credit mix.

What is a Credit Mix?

Simply put, the credit mix refers to the holding various types of credit accounts such as mortgages, loans, and credit cards. It’s a factor that’s usually taken into account when determining the credit scores. Having a diverse credit mix is beneficial to your CIBIL score. In general, credit mix determines 10% of a FICO score. Let’s see complete breakdown of credit mix:

Here Are The Different Types Of Credit That Can Boost Your Credit Score

Revolving Credit

Revolving Credit is one of the most common forms of credit. It’s a credit line with no limit to how much you can borrow or when you can use it. It includes credit cards and home equity lines of credit, and it typically requires monthly payments as well as interest rates if the borrower owes money.

If a borrower chooses revolving credit, the credit limit does not change as long as the borrower makes payments on the account. As long as the cumulative limit is not surpassed, a borrower will return to the account as much as he or she needs to borrow more money.

Instalment Credit

Instalment credit is a loan on which you make regular payments over a set period of time. It covers a wide range of loans, including student loans, mortgages, car loans, and personal loans. Like other types of credit, instalment loans will help you build and maintain good credit scores if you pay them on time. If you apply for an instalment loan, your credit scores will determine your interest rates and requirements.

Open Credit

Open credit is a more uncommon form of credit. It refers to accounts from which you can borrow up to a certain amount of money. However, the borrowed sum must be repaid in full each month. It’s typically associated to credit cards.

Importance of Having Different Types of Credit

Having different types of credit accounts is considered as one of the most common factors to measure credit scores. However, most of the customers are unaware of this. Having multiple credit accounts, such as a mortgage, personal loan, and credit card, shows lenders that you can handle multiple forms of debt at once. It also helps them to get a better picture of the borrower’s financial situation and ability to pay back the debt.

Although having a less diverse credit portfolio does not always imply a lower credit score. Nearly 10% of credit scores are determined by credit mix, which could be a key factor in achieving a high score.

How Does a Good Credit Mix Help in Boosting your Credit Score?

When you have both instalment and revolving credit, you have a good credit mix. For example, you have a credit card, a personal loan, and an auto loan under your name. And you’re making the monthly fixed payments on your instalment credits, and you’re using your credit card at a 30 percent utilization rate (though you may use more, which isn’t optimal and may be a risk factor for your profile in near future).

So, if you have a credit card, it should be used properly and, if payments are made on time, it will help to improve your credit score. It will also allow the lender to see and be assured about how well you have managed your credit accounts. Furthermore, it will build trust in lender’s eye and thus they will report good credit behaviour to Credit agencies. This will help the credit agency in analyzing your credit report and will also provide you a detailed report on the way you have handled your credit accounts.

Bottom Line

Before applying for any of the additional credit accounts, you must be aware about the purpose behind availing the credit. A good mix of credit accounts along with timely repayment will show the lenders that you are financially responsible. On the other hand, if you fail to repay the borrowed amount on time, your credit score will be impacted negatively.

Hence, to maintain a healthy credit score, you must keep reviewing your credit and keep a track on your credit report. Also, you should be aware of your credit score before applying for any kind of loan. Hence, it is highly recommended to check your free Cibil score and keep track of your records.

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