Applying for a loan and getting a smooth approval is a sheer delight for borrowers. But have you ever thought about what makes loan or credit card approvals a smooth sail? It’s your brilliant credit score, which must have been above 750 out of the maximum 900. Among the many things that contribute to your excellent credit score is the optimal credit mix you have. Now you will be curious to know the credit mix meaning, its types, significance and several other factors that affect it.
Please spare some time with us to unravel the concept of credit mix and how it helps you notch a higher credit score.
What Does Credit Mix Mean?
Credit mix refers to a diverse range of credits such as personal loans, home loans, credit cards and alike. Every credit will bring certain repayment responsibilities on the part of borrowers. Managing payments of various debts on time indicates good credit behaviour.
What is a Good Credit Mix?
A good credit mix is a combination of secured and unsecured loans. Simply having either of these may not impact your credit score as positively as it can when having both types of credits and servicing them on time.
Secured credits can be a home loan, loan against property, loan against security, gold loan and alike. As the name suggests, these credits are disbursed against collateral.
When applying for a home loan, the lender mortgages it with the property you buy. Similarly, a loan against property is a type of credit granted to fulfil your personal purposes against a home you own. Loan against securities is granted against stocks, mutual funds, and bonds and other debt instruments. A gold loan, on the other hand, is disbursed against gold ornaments. This is one of the types of a 5-minute loan offer. All these loans are disbursed at a value less than that of its collateral, making credits secured.
Now come to unsecured loan types, which can be a personal loan, credit card or even a business loan. A personal loan and a credit card are outright unsecured loans as lenders don’t ask for any collateral while disbursing these two. However, banks do offer secured credit cards against fixed deposits. Such credit cards will form part of secured credits. Business loans are granted with or without collateral. When granted without collateral, they will be classified as unsecured credits.
Types of Credit Mix
Credit mix can be of the following types.
Revolving Credit
Here you use the credit limit assigned to you. The limit will be reduced to the extent of utilisation. Once you pay for the utilised sum, the limit will be restored. This is called revolving credit, which is typical of a credit card.
Instalment Loans
These loans have to be repaid via Equated Monthly Instalments (EMIs) over a fixed term. Examples include personal loans.
Mortgage Loans
These are usually financed by mortgaging the property. Borrowers need to repay these loans over the fixed term in instalments. Examples include a home loan and a loan against property.
The Positive Effective of an Optimal Credit Mix in Credit Score
An optimal credit mix is formed with a list of secured and unsecured credits. Repaying all these debts successfully comes with disciplined financial management. The reward for displaying the same results in raising your credit score.
Here’s one of the best credit mix examples before you. Suppose you have a home loan, a personal loan and a credit card. You are paying the dues of all three on time. In contrast, your friend has just one car loan. Even if he pays the same on time, his score, despite being good, will be less than yours.
How to Constitute an Optimal Credit Mix?
It will depend on the exact situation at hand. Given below are some situations where we have illustrated ways to ensure an optimal credit mix.
If You Have a Credit Card and a Personal Loan, Apply for a Secured Credit Instead of Unsecured
The logic for the same is simple. Too many unsecured loans make lenders feel circumspect about your credit behaviour. In case you default on any of these, your credit score will fall rapidly. So, if you have a credit card and a personal loan already, look for a secured debt like a loan against securities or a gold loan, should the need arise. This will help optimise your credit mix. Paying them on time will thus lead to a good credit score.
Don’t Apply for Too Many Credits Too Quickly
Just to increase the debt portfolio, one should not be applying for credits. Applying for too many loans too quickly can lead to rejections in certain cases, resulting in a reduced credit score.
Wrapping Up
The credit journey needs to be smooth to avail new credits without any hassles. This is where a good credit score enabled by an effective credit mix and payments of debts on time can help. Display responsible credit behaviour to raise the scope for faster loan or credit card approvals in the future. To check more such insights, visit zarooribaathai.in.
