Credit Mix: How Does it Affect your Credit Score

When you check your credit score, your credit mix is one factor that influences it. And so, whenever you look for ways to improve your credit score, you get a suggestion to improve your credit score. Now, what exactly is credit mix?

A credit mix is the variety of credit types in your credit history. It shows how well you handle different types of credits.

Let's explore the meaning of credit mix, along with its types and how to maintain a good credit mix.

What Is Credit Mix?

A credit mix refers to the different types of credit accounts you have in your credit history. It is used to measure the diversity of your credit profile. With a healthy credit mix, you can show the lender that you can responsibly handle different types of credit. A healthy credit mix shows the lender that you can manage both short-term and long-term credit accounts.

Also Read: Short-Term vs Long-Term Loans

Credit scoring models consider a diverse mix of credit accounts as a positive signal. Here's why credit mix matters in your credit score:

• Shows well-balanced credit behaviour: If you can manage a diverse mix of credit accounts well, it signals that you manage money responsibly.
• Reduces perceived risk: Let's say you have never taken out a credit, except for a credit card. Now, the lender might perceive you as high risk in managing long-term payment agreements. But a healthy mix of credit accounts lowers the risk.
• Improves other credit factors: With a healthy mix of credit accounts, you show a long credit history. For example, if you have a home loan for 5 years, and you are managing a credit card you got 3 years ago, your average credit history improves further.

Types of Credit Accounts Included in Credit Mix

There are two types of credit accounts: installment credit and revolving credit. Let us understand what these mean and include:

Installment Credit

With an installment credit, you get a lump sum of funds, which you will usually repay in installments over a specific period. Here are the common types of installment credit options:

• Personal loans
• Mortgage loans
• Auto loans
• Student loans

Revolving Credit

When you choose a revolving credit, you are assigned a credit limit each month. This is the maximum amount that you can borrow. With a revolving credit, you can borrow, pay off, and then reborrow the amount up to the limit. Here's what it includes:

• Credit cards
• Home equity lines of credit
• Retail credit cards
• Personal lines of credit

Best Credit Mix for Credit Score Improvement

There is no ideal credit mix for a good credit score. It is a factor that naturally evolves as you make financial decisions. However, the minimum you should have is at least one type of revolving credit and one type of installment credit. 

If you have four credit cards and no existing loans, it might impact your credit score negatively. But do not take a loan just to improve your credit score. If you make regular payments and manage your credit cards well, you can still maintain a good credit score.

However, if you carry the credit card balance from one month to the next, applying for a personal loan to help manage your debt might be an ideal way.

Also read: 5 Credit Rules for Millennials to Follow

How to Improve Your Credit Mix Responsibly?

The key to improving your credit mix responsibly is to manage diversified credit accounts without adding unnecessary debt or overborrowing. Here's how you can do it:

• If you have had only loans and never had a credit card, get a low-limit credit card. Use it for regular purchases, and pay it off every month to add revolving credit
• Do not close your old loan account or credit card unless it is necessary. These accounts are beneficial for your credit mix and help you maintain a payment history
• If you are building credit from scratch, it is difficult to get your credit card approved on your own. Until you are ready to apply, ask your financially responsible close one to add you as an authorised user on their credit card account
• Avoid opening and applying for new credit accounts in a short period of time

Also read: How to Rebuild Your Credit Score: A Complete Guide

Monitoring and Managing Your Credit Mix

As per a report, 46% individuals who regularly monitor their credit report noticed improvement in credit scores within six months.

• Monitor your credit report to see how new accounts, credit variety, and timely payments impact your credit score. Plus, you can also identify errors and correct them quickly
• Use tools like Experian Boost® to add on-time payment history of certain household bills to build credit.
• Set up alerts to get notified about significant changes in your credit report to react quickly

Manage Your Credit Mix With Hero FinCorp

A healthy credit mix signals that you can manage debt responsibly. It improves your credit scores and gives lenders confidence about approving your loan. Pay debts on time, and avoid taking loans just to improve your credit mix. Your credit mix will naturally improve as you add new credit accounts.

And if there are not many credit options available due to a low credit score or you want to improve your credit mix, a personal loan is an ideal choice.

With Hero FinCorp, you can apply online and get approval quickly. Simply install the instant loan app, and apply for a personal loan online.

Frequently Asked Questions

What is credit mix, and why is it important?

A credit mix means having diverse credit accounts in your credit history. A healthy credit mix improves your credit score and gives the lender confidence that you can manage debt responsibly.

What is the best credit mix for a good credit score?

The ideal credit mix involves having at least one revolving and one installment credit account, but avoid taking a loan just to improve your credit mix.

Can opening new credit accounts improve my credit mix?

Applying for and opening new credit accounts in a short period can affect your credit score negatively. So, while a diversified mix of credit accounts helps improve credit mix, it is not recommended to open new credit accounts just to improve your credit mix.

Are payday loans included in the credit mix?

Payday loans are not included in your credit mix.

How often should I check my credit mix on my credit report?

You should check your credit report at least once a year, and ideally once every 3 months.

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