Different types of credit can have varying impacts on your credit score. It is often emphasised that borrowers should opt for multiple credit options to maintain a reasonably high credit score.
This means rather than relying only on one credit option, one can diversify credit across financial instruments to keep the credit utilisation ratio (CUR) underutilised.
Different credit options that impact the credit score:
Credit Cards
A. Your credit card usage and payment history have a significant impact on your credit score. Making timely payments and keeping credit card balances low relative to your credit limit can have a positive effect on your credit score.
B. High credit card balances, maxing out credit cards, and missing payments can negatively impact your score.
Car or home loans
A car or home loan, also known as instalment loan, also has a significant impact on your credit score, particularly in terms of payment history and credit utilisation. If you make timely payments on installment loans, it helps improve your credit score.
B. Missing payments or defaulting on installment loans can severely damage your credit score.
Account overdraft
A. Overdrafts can impact your credit score similarly to credit cards, depending on your payment history and credit utilisation. Making timely payments and responsible use tends to positively affect your score.
B. High balances and missed payments can harm your score.
Collateral loan
A. Mortgages are considered a significant financial responsibility, and your payment history and credit utilisation will heavily influence your credit score. Timely mortgage payments tend to impact your credit score positively.
B. Missing mortgage payments or defaulting on a mortgage can significantly damage your credit score.
Personal loans
A. Personal loans impact your credit score similarly to installment loans, based on payment history and credit utilisation. Timely payments on personal loans can help improve your credit score.
B. Missing payments or defaulting on personal loans can negatively affect your score.
Overall, responsible management of various types of credit, including making timely payments and keeping balances low relative to credit limits, can help maintain or improve your credit score. Conversely, missed payments, high balances, and defaulting on loans can have adverse effects on your credit score.
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Frequently Asked Questions:
Is it advisable to take loan from one credit option only?
No, it is advisable to spread across multiple options such as credit card, personal loan, car loan, so on and so forth.
What is the minimum CIBIL score required for car loan?
The minimum CIBIL score required for a car loan can vary based on the lender’s policies and a number of other factors such as income, current debt, job stability and amount of down payment.
What does the CIBIL score above 700 indicate?
A CIBIL score over 700 shows a good credit history and demonstrates to the lender that you are likely to repay the loan on time.
How does account overdraft impact your credit score?
When a high balance is maintained and payment is missed, the account overdraft just as a credit card impacts the credit score adversely.
What should one do to ensure that availing multiple loans does not impact the credit score?
It is imperative that you clear your payments on time and do not delay or default on your dues.
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Published: 12 Mar 2024, 10:48 AM IST