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How a Good Credit Mix Can Increase Your Credit Score?

IndianMoney.com Research Team | Updated On Thursday, June 20,2019, 02:35 PM

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How a Good Credit Mix Can Increase Your Credit Score?

 

 

A credit mix refers to the different types of credit (loans and credit cards) availed by the borrower. A credit mix shows how well you can manage different kinds of debt. There are 4 crucial factors that affect credit score – repayment history, credit utilization ratio, length of credit history and credit mix.

A single type of credit does not help you get a good credit score. Credit mix has 10% weightage in credit score and a good credit mix helps achieve a good credit score.

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How a Good Credit Mix Can Increase Your Credit Score?

Credit Cards: Credit cards help borrow for the short-term. Credit cards are a short-term line of credit, offered to customers by banks. While using a credit card, follow the steps given below to increase your credit score:

  • Repay borrowed amounts within the billing cycle + grace period.
  • Try to repay credit card outstanding balance at least 5 days prior to the due date.
  • Use credit card mainly for small purchases which can easily be paid off at the end of the month.
  • Don’t exceed credit limit as it negatively impacts credit score.
  • Maintain consistency and regularity with the usage of credit card.
  • Pay off outstanding credit card dues on time. In this way you can avoid pilling up debt.

Using a credit card responsibly shows the capability of handling debt. Lenders view you as a credible customer who can manage personal finances responsibly and pay off debt on time.  A secured credit card helps build credit score slowly and steadily over time.

See Also: Check Credit Score Online

Secured and Unsecured Loans: Banks offer two types of loans - Secured and unsecured loans. A secured loan is where the borrower receives the loan amount by offering collateral as security against the loan. In case of a default, the lender has the capacity to sell off the collateral and recover dues. Collateral can be an asset or a property owned by the borrower.

An unsecured loan is where the lender sanctions the loan amount, without any collateral or security. A lender prefers secured loans to unsecured loans. The credit report contains information on loans availed, so a car loan or a home loan works in your favour vis-a-vis personal loans or credit cards. However, never forget that 35% weightage is assigned to repayment history. So, if you have availed a loan (secured or unsecured), make sure to repay it on time.

See Also: Cibil Score For Credit Card

Credit Mix: Maintaining a good credit mix is not an easy task, as paying off your loan EMIs as well as clearing your credit card dues, leaves empty pockets. But, maintaining a good credit mix shows how responsible you are in paying off multiple loans and credit card bills. The different types of credit that can be a part of credit mix are education loan, credit card, secured loans like car loan, LAP or home loan.

Guarantors and Co-Applicants: A guarantor or a co-applicant is equally responsible for paying off the loan (Just like the main applicant). A guarantor is a kind of security for the bank and these are considered secured loans. Before granting loans to such borrowers, the banks evaluate credit information on both the original applicant and the co-borrower.

See Also: Free Credit Score

Good credit score (co-borrower) serves as an added advantage for the main borrower. By signing a loan as a co-borrower, you can steadily increase your credit score. However, make sure not to stand guarantor for a person you don’t trust. Signing a loan as co-borrower is an excellent way of increasing your CIBIL score, but stand guarantor only to spouse/parent or a friend/relative whom you can trust to repay the loan. 

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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