We completely understand and agree to the fact that the credit report plays a major part in our financial life and in fact, is the key to unlock affordable loan offers. Whenever you apply for a new loan or credit card, the very first thing that lenders check to determine your eligibility is the credit report as it gives a clear reflection of your financial health. While we understand the significance of a credit health report, we sometimes skip having the factors in sync, like not having a good credit mix of accounts, and this petty ignorance ultimately have a big impact on the credit scores. That’s probably because we have a little or incomplete knowledge of the key factors, which play a huge role in generating the credit reports.
So, before things get out of the hands, let’s get an understanding of credit mix, often the most overlooked factor in terms of financial health.
What is a credit mix?
As the name suggests, credit mix refers to the types of secured and unsecured loan accounts on a credit report. The factor accounts for 10% of the overall credit scores and is a prominent aspect for the lenders to determine whether the borrower can manage the type of loan account, which he/she is applying for.
Remember, when you apply for a certain type of loan, lenders are keen to learn how well you have managed different credit accounts so far. This gives a sneak peek of your financial health and credit behavior to the lenders.
Significance of credit mix:
There’s a saying, “Don’t put all your eggs in one basket”, and this surely endures a reason in credit report. Juggling and balancing is an important part of a healthy financial life and truly has to do a lot with your credit scores. Therefore, if you want your financial portfolio look attractive and considerable to the potential lenders, then it is necessary to keep a balance of secured and unsecured loan accounts in a credit report.
However, not necessarily it is important to have a mortgage loan or home loan, while having an active personal loan account. But, it is about how well you manage your types of loan accounts. Therefore, instead worrying about getting loan unnecessarily to keep a credit mix balance, try focusing on your active loan accounts to ensure timely payments. Maintaining good repayment behavior over a long period of time also has a positive impact on your overall credit scores. Thus, you can qualify for higher loan values and different credit accounts.
Types of loan accounts in a credit mix:
Basically, the types of loan accounts are classified as installment credit and revolving credit.
1. Installment credit : Installment loans basically have a fixed repayment schedule through a series of EMIs due every month or at a certain period. It has a set monthly payment and tenure to pay off the borrowed amount along with the interest and other charges. It often involves collateral or security against the loan, so that in case the borrower defaults payment, lender has all the legal rights to confiscate the collateral to recover the outstanding loan amount.
Installment credit includes,
• Mortgage loan – This type of loan is borrowed to buy a house or real estate property. Mortgage loans typically have repayment tenure of 10 to 30 years, subject to the borrower’s eligibility and upper age limit.
• Personal loan – It is a type of unsecured loan, which is borrowed to meet different end-needs such as funding a wedding, pursuing a degree, debt consolidation, or taking care of a medical emergency. Personal loans are often sanctioned for a period of 12 months to 5 years. However, due to its unsecure nature of loan, the interest rates are comparatively higher than the secured loans.
• Auto loan – When a loan is borrowed to purchase an automobile like car, scooter, bike, or van. Generally, the tenure of auto loan ranges from 12 months to 7 years and could be up to 10 years in some exceptional cases, subject to the type of vehicle to be purchased.
• Education loan – This is typically borrowed to pursue higher education degree or courses and the repayment period usually starts after 6 months of completion of a degree or securing a job.
2. Revolving credit : Revolving credit is a type of credit that doesn’t have any fixed repayment schedule or tenure. Lenders simply extend a specific credit limit to the borrowers and thus, whenever the need arises, credit holder can withdraw the amount up to the agreed limit and repay the borrowed sum before the due date. Credit card is a perfect example of revolving credit, where the amount of debt can fluctuate in every statement as per the cardholder’s cash needs.
Home Equity Line of Credit (HELOC) is another example of revolving credit, where a lender sanctions maximum loan limit to the borrower for a certain period of time. The loan is not advanced to the borrower in lump sum, instead line of credit is used to withdraw amount from the specified limit only when the need arises.