What is Credit Mix and Why is it Important

When assessing your credit profile and assigning a credit score, credit bureaus give maximum weightage to repayment pattern, followed by the credit utilization ratio, length of credit history and other factors.

However, an important yet one of the least talked about factors is your credit mix. It refers to the types of credit accounts that you have in your portfolio including revolving credit, installment credit, secured and unsecured debts, etc. In this article, we shall talk about why credit mix is an important part of your credit score and how it can help you build a good credit score.

What is Credit Mix?

As mentioned above, credit mix refers to a combination of different types or forms of credits in your credit portfolio. These can include credit cards, secured or unsecured loans, etc. The different forms of credit accounts you own together make up your credit report and have a direct impact on your credit score. A credit mix can have a combination of mainly two types of credit lines – revolving and installment credits as described below:

Revolving Credit- Revolving credit comes with a credit limit, which is updated as per your usage and is replenished with every debt repayment. You can use the borrowed amount up to your credit limit; and repay it over time to replenish the available credit. Using revolving credit, you can borrow multiple times as per your requirement. Credit cards are a popular example of revolving credit. Moreover, revolving credit does not come with a fixed end date for repayment or any limitation on the number of transactions that you can make. Moreover, users have to pay interest only on the outstanding balance amount post the payment due date and not on the entire credit limit.

 

Instalment Credit- An installment credit account is one wherein a fixed amount of credit is loaned and has to be repaid as fixed monthly payments over a pre-determined period. Most types of loans, including education loan, home loan and personal loan, are a type of installment credit. Installment credit comes with a fixed loan term within which it must be repaid and you receive the borrowed amount in lump sum. If you want to borrow more, you will have to take a separate loan.

These credit types can further be categorized as secured and unsecured credit. Secured credit is given against a collateral asset, like a house, cash deposit, etc. On the other hand, an unsecured credit line is provided without using any asset as a guarantee or security against payment default.

When you have all four types of credit accounts in your profile, your credit mix will be considered a diverse one and it will positively impact your credit score. For example, if you have one or more credit cards, a personal loan and a home loan, you would be able to meet the said criteria. It is important to note here that credit mix is only given a minimal weightage in credit score calculation. We will further discuss how it helps you and to what extent.

Why is it recommended to have a diverse credit mix?

While calculating the credit score and preparing your credit report, your credit mix is also taken into consideration. A more diverse credit mix with different types of credit lines highlights a more comprehensive credit history. Having different forms of credits also portrays your ability to successfully manage multiple types of credit, given you maintain all your credit accounts responsibly and make timely repayments. This also increases your trustworthiness when it comes to offering you future credit lines. Thus, having a healthy credit mix with revolving and installment credit is recommended as it has a positive impact on your credit score and improves your creditworthiness.

However, applying for different forms of credit just for the sake of building a diverse credit mix is not advisable. Opening several credit accounts can affect your score negatively at times as this can make you look credit hungry. It can also become difficult to manage multiple credit accounts simultaneously.

If you do not repay the borrowed amount on time, your credit score can drop despite a good credit mix. Hence, having a diverse credit mix is encouraged to build a healthy credit portfolio, if handled wisely without any payment defaults. 

While a diverse credit mix may be good for your credit profile, maintaining just a single form of credit does not harm your credit score either, if you manage it well. This is because credit bureaus give maximum weightage to bill payments. So, if you are making timely payments of your dues, you can build and maintain a good credit score even with a single type of account.

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