Are you thinking of applying for a loan to meet your financial needs? The first thing that you should be concerned about is your credit score. A good credit score is a prerequisite in order to get loan approvals from most of the lending institutions. There are various factors that influence the credit score calculation. The important factors among them are the payment history and the percentage of credit limit utilized that grossly impact your score calculation. So if you are looking to improve CIBIL score then these are the most important aspects that you should take care of.
However making payments on time and keeping the debt levels low are not the only ways that will help improve credit score. There is another aspect that affects the credit score. It is the credit mix or the type of accounts in your loan portfolio. The most common type of accounts are classified as installment accounts and revolving accounts.
Instalment accounts are debts where fixed payments are made each month. The total amount borrowed has to be paid in instalments over a specified period of time. These loans may be secured by some kind of an asset but not always. The most common examples are home loans, car loans and student loans.
In case of revolving accounts like credit cards or home equity line of credit the lending institution specifies the maximum amount of loan that you can take. The credit line is open and accessible to be used as per the need. Depending on how much credit line one has used different amount of payments are done each month. In these accounts you are not required to make the full payment each month. Instead you can just pay the minimum payment required for the month and revolve the balance to the next month. Interest accrues on the balance amount carried over to the next month.
It is true that you just need a single line of credit to build your credit history. But only making timely payments on one account is not enough if you are aiming for an excellent credit score. The credit scoring models give more weightage if a person has shown his capability to handle different types of accounts. People who show a healthy balance of usage of different types of credit are a lesser risk to the banks. Hence an important step to enhance credit score is to have diversity in the type of credit that you handle. It will help in nudging up the score by a few points.
Now that you understand the importance of credit mix, the next big question is what is the perfect ratio of one type of account to another? How do you strike a balance in order to use the credit mix factor to your advantage? Financial experts recommend that you should have one loan for every 3-4 credit cards. Also you should spread out your credit debts over multiple credit cards rather than carrying all the balance on a single card. If your credit profile is only dominated by credit cards then you should think of adding some variation to your finances. Having 1-2 loan accounts gives a positive indication that you have the capability to make steady payments over a long period of time. This helps to improve credit score. So next time you are in need of funds consider choosing a loan instead of a new credit card. But remember you should open a new account only if there is a need and if you can afford it. Don’t just take on a financing just to improve your credit mix. A default on payment will be more damaging than not having a variety of accounts. If you do take on new loans make sure you keep track of the due dates. You need to keep the payment history intact.
So if you wish to increase Cibil score, remember it is not just about paying your bills on time. You need to take care of all the factors that constitute the credit score and enhance the lenders ’perception of your financial experience. Paying attention to subtle details like the mix of credit will help you boost your credit standing.
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