Here is how different types of credit lead to a better CIBIL score

Today, each of your financial activity is being tracked not just by your bank, but the premier credit bureau in the country, Credit Information Bureau Limited (CIBIL) to rate you on your credit behaviour. Each time you apply for a new loan or credit card, your CIBIL score becomes a parameter of how creditworthy you are. Moreover, potential employers these days are often asking for the CIBIL report of potential recruit. This is to assess how responsible one is with his finances and thus how trustworthy and responsible he will be in his job.

The most important factor that has a 35% bearing on your CIBIL score is your payment history. There are other factors that impact your CIBIL score are credit utilization or how much of your total credit you have used, how long how you been servicing debt, the amount of new credit you have taken or applied for and the mix of your credit. Here we talk about how the mix of your credit can improve your CIBIL score.

Having a good mix or secured and unsecured loans
One thing that helps you attain a high CIBIL score is a good balance of secured and unsecured credit. A mortgage or an auto loan qualifies as a secured credit. But having these and not having an unsecured credit won’t make you a good scorer. A credit card with a reasonably high credit limit, or a personal loan qualifies under the head of unsecured credit. Unsecured credit means that no collateral or advance payment is required to be paid by the consumer at the time of the disbursal of such credit. Having a mortage or an auto loan and credit card that you service on time is a good way to diversify your credit mix and keep a high CIBIL score.

Installement credit
Another type of credit that helps you score points on the credit mix front, is having some exposure to installment credit. If you have do not have a mortage or a loan for a vehicle, your student loan qualifies as installment credit as well. In other words, any kind of loan with a fixed amount of repayment each month under a pre-specified time frame qualifies as installment credit. So, if you are in your first job and still servicing a student loan for a management degree or a vocational degree that you have recently completed, you are still scoring high with CIBIL as far as your credit mix is concerned.

Finding the right balance
The trick to have a good credit mix is to have a good balance of active credit. If you do not have a student loan and are not in a position to apply for a mortgage or an auto loan just as yet, do not be under the impression that no credit will help you have an impeccable CIBIL score. While we are not asking you to be reckless and apply for loans, you may want to start out small and prove that you are creditworthy by applying for a credit card at first when you are stepping in your professional life. A credit card is a great way to build your credit profile if you are using it responsibly. Spending within your means on the credit card and making outstanding payments in full is a great example of prudent use.

A word of caution
While we are reiterating the fact that you must diversify your credit mix, you should not consider it to be a green flag to go and apply for every loan on offer. In this intensely competitive financial world, telemarketeers and even direct mailers are always trying to lure you with loans on “low rates of interest” or “lifetime free” credit cards, but do bear in mind that things are being sugar coated and you are not being given the full picture upfront.

So don’t bite the bait easily. Not only will you end up with a loan that you do not need, your CIBIL score may drop as a result of too many hard inquiries. A hard inquiry on your CIBIL report happens when a lender accesses your CIBIL score and report to see how creditworthy you are. Therefore, your aim to diversify your credit profile may backfire against you!

Thus, as you can see diversification of your credit mix is a great way to improve your CIBIL score it has an important bearing on your CIBIL score. But when you set out to diversify your credit profile, do so carefully so as to avoid a boomerang and end up with a lower score instead!

(Rajiv Raj is the Director and Co-Founder of www.creditvidya.com)