A credit score plays a very important role during the approval procedure of your home loan. A three-digit number that ranges from 300-900 reflects your creditworthiness and the repayment capacity to the banks or financial institutions. However, when it comes to credit score, many factors impact its number. Among them, the important one is Credit Mix.
A credit mix includes various types of accounts such as home loans, credit cards, personal loans that make or break your credit score. So, let’s understand the concept in details and how it helps in boosting credit score:
Types of Credit Account
There are three types of Credit Mix that exists in the financial world:
Revolving Credit Account
This is one of the most common forms of credit mix wherein you can borrow easily but within a limited range. For example, credit cards are a form of revolving credit mix where you can purchase any item and pay the amount in the next billing cycle. However, the maximum spending depends on the credit card limit which may depend on the salary of an individual.
Installment Credit Account
This credit account includes borrowing of a loan with some fixed amount and then paying it back to the banks or financial institutions monthly in the form of EMI. These credit accounts comprise of vehicle loans, personal loans, etc.
Open Credit Account
This type of credit account is very much rare and not known to everyone. This type of credit account doesn’t appear on the credit reports too. An individual can borrow a maximum amount but then, they have to pay back the full borrowed amount every month. Charge cards the best examples of open credit.
How Credit Mix Affect Credit Score?
Having a good credit mix directly impacts your credit score. If you are good in maintaining and repayment of your different credit account, then you can easily gain the attention of banks and can also boost your credit score in one go.
For example, A and B both have two credit accounts one revolving and another installment. A pays all the bills and EMIs of both credit accounts of the time, on the other hand, B delays it every month. Because of the creditworthiness of A, the credit score ranks high as compared to B.
However, an individual must remember that just to boost the credit score, he/she must not opt for various credit accounts which in later stages they find difficult to manage. Paying either your credit card bills completely or EMIs of personal or education loan monthly, maintaining just one amount single-handedly also works for credit score as well as credit utilization ratio.
And, if you want to add different accounts to your portfolio, be responsible and manage your financial expenses carefully.