Personal loan: How does it help create a healthy credit mix?
A personal loan is seen as a panacea for sudden financial crisis. It could stem from an emergency or home renovation, higher education or a wedding.
Aside from meeting one or more of these financial needs, a personal loan also helps the borrower create a healthy credit mix which is a blend of different credit options. These include credit card, home loan, car loan and personal loan. But why is this important?
What is a credit mix?
Credit mix refers to the blend of different types of credit accounts that you have on your credit report. It is one of the factors that credit scoring models consider at the time of calculating credit score.
Typically having a blend of revolving and instalment accounts is considered positively. For instance, keeping a credit card along with a personal loan or a home loan is seen as a diverse credit mix.
How does personal loan help create a healthy credit mix?
A personal loan helps significantly in maintaining a healthy credit mix. This happens by adding an installment credit account to credit report. Typically, most people start their credit journey with credit cards which is a revolving credit account. Although they are quite good in building credit, relying only on them does not indicate your ability to manage different categories of debt.
Therefore, having both revolving credit as well as installment (in form of personal loan) on credit report are vital for creating a diverse credit mix.
What are the factors to consider?
One should not take a personal loan only for the sake of credit mix. Being aware of credit mix is vital to maintain a healthy credit score but it develops organically as you cross different life stages. For instance, as a young person you take student loan then as you start working, you secure a credit card and car loan. Later, you could take a home loan for buying a house.
Also, it is more important to make regular payments of outstanding liabilities such as credit card bills instead of merely keeping loans in your account to create a credit mix. This is because default in payment stands to cause more damage than the benefit arising out of multiple credit accounts.
Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
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