Credit mix refers to a combination of different types of credit accounts. A good credit mix is a balanced combination of these accounts. A good credit mix is a strategic route to significantly improve your creditworthiness, i.e., your ability and reliability in repaying borrowed money.
While there isn’t a magic formula to create an ideal mix, a few factors play a significant role in evaluating the credit mix. Let’s understand how you can build a strong credit mix using the example of a borrower – ‘Mr. Needy’.
Credit cards – Having one or more credit cards can demonstrate Mr. Needy’s ability to manage revolving debt. He must ensure he uses his credit cards wisely and continues to make regular payments. Additionally, by keeping a low credit utilization (approximately less than 30% of the credit limit) he indicates creditworthiness, and this is perceived positively by his lenders.
Personal Loans – Personal loans have fixed monthly payments over a specific term. Alongside credit cards, these loans in Mr. Needy’s credit mix show his ability to handle long-term financial obligations. When Mr. Needy continues to make timely monthly payments, he is viewed as a responsible borrower.
Secured Loans – Secured loans backed by collateral such as home or auto loans diversify Mr. Needy’s credit mix. Responsibly managing these loans by keeping a check on the balances works in his favor and proves his solidarity in handling substantial financial commitments.
Similarly, an educational loan would indicate Mr. Needy’s ability to handle specialized loans. Gold loan, where one pledges gold as a collateral to borrow, can also contribute to the credit mix.
The specific combination of credit accounts that constitutes a good credit mix may vary depending on individual preferences and circumstances. It is therefore not necessary to have every type of credit account listed. Ultimately, the key is to maintain a balanced mix and manage all credit accounts responsibly.
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