Credit History

Credit History
A borrower’s credit history is a complete record of how well they have managed their debts. This information is collected and organized in their credit report.

What is Credit History?

A borrower’s credit history is a complete record of how they have managed their debts. Your credit history includes how many accounts you have, how long each account has been open, total amount of available credit that’s been used, whether or not payments are made on time, and the number of recent credit inquiries.[1] This information is then collected into a document called a credit report.

What is a credit report?

Credit reports are collected and maintained by credit bureaus, also known as credit reporting agencies. The credit bureaus then sell those credit reports for a fee to lenders. Lenders and financial institutions use these reports to decide whether or not to grant a loan to an individual.[2] They use credit reports and credit scores, which are based on credit reports, to determine if a potential borrower is creditworthy. In the United States, there are three major credit bureaus: Equifax, Experian and TransUnion.[3]

What is a credit score?

A person’s credit score is basically a numerical grade that indicates whether or not they are creditworthy. The most common type of credit score is the FICO score, which was created in 1989 by Fair, Isaac & Company. (The company changed their name to FICO in 2003.) The FICO score uses a scale from 300 to 850; 300 is the lowest (or worst) score, and 850 is the highest (or best).

How is my Credit History used to determine my credit score?

A FICO score is based on the information found in a person’s credit report. The scoring process weights some factors as more important than others. According to FICO’s website,[4] the score is weighted like so:

Payment History35%
Amounts Owed30%
Length of Credit History15%
Credit Mix10%
New Credit Inquiries10%

There are many different factors in a person’s credit history that can impact their credit score. The most important factors in determining your credit history are your history of making payments on time, and how much debt you currently owe. It is also important that a person not have used too much of the credit available to them. This means that maxing out your credit cards will hurt your credit score.

When it comes to the length of a person’s credit history, longer is generally better. If you have just recently started using credit, it could take a while for your credit score to improve. Credit mix is another factor; credit mix means the variety of different types of debt that you carry like student loans, mortgages, credit cards, etc. A diverse mix is generally preferred. Lastly, your credit score takes into account whether you have any recent credit inquiries (which are discussed below in more detail).

How can my Credit History hurt or help my credit score?

A notice of debt collection will always negatively affect a person’s credit score. These are unpaid, past-due accounts that have been sent to a third-party collection agency. These are businesses that contact borrowers and urge them, often unpleasantly, to pay what they owe. Some debt collectors are known for their aggressive, borderline-illegal tactics.[5] Depending on the size of the debt, a debt collector can even take a person to court and have their wages garnished. When a bill or account has been sent to collections it is seen on your credit report as a derogatory mark.

One factor that can positively affect an individual’s credit score, and overall creditworthiness, is the average age of their open credit lines. Basically, the longer you have a well-managed credit line, the better it looks to potential lenders. If a borrower has a credit card and has been able to make every payment on it for several years, they have demonstrated that they are a responsible borrower.[6]

A person’s credit history not only contains the total number of accounts they currently have open, it also includes any past or closed accounts that they have had in the past seven years. These accounts include ever type of debt: credit cards, personal loans, auto and student loans, and mortgages. Having multiple, well-maintained lines of credit in their credit history will positively impact a person’s credit score. However, it’s typically not recommended to open several new lines of credit simply to increase your total number of credit accounts.

The number of hard inquiries made to your credit history can also affect your credit score.

What is a credit inquiry and how can it affect my credit score?

There are two kinds of inquiries that can occur on your credit report: hard inquiries and soft inquiries. While both types of credit inquiries enable a third party, such as you or a lender, to view your credit report, only hard inquiries can negatively affect your credit score.

These inquiries occur when a financial institution checks a borrower’s credit in order to decide whether or not to approve them for a loan or line of credit. A hard inquiry may occur when you apply for any of the following: auto loan, student loan, business loan, personal loan, credit card, or a mortgage.

The other type of inquiry that can happen on your credit report is a soft inquiry. These type of inquiries occur whenever a person or company checks a borrower’s credit report as part of a background check. They also occur when a person is pre-approved for a credit card offer or when a person is checking their own credit score. Soft inquiries can occur without your permission, but they will not affect your credit score.

A person’s credit score is usually penalized when several hard inquiries occur within a short period of time. Frequent applications often indicate a borrower who is desperate for credit, and thus, is unlikely to be creditworthy. While one hard inquiry might knock a few points off a credit score (if any), multiple hard inquiries in a short amount of time may cause significant damage.

How can I improve my Credit History or my credit score?

Your credit history and credit score can both be improved over time by making regular on-time payments. Changing spending, repayment, or budgeting behavior is a critical first step to rebuilding credit history. With consistent effort over time, your credit history will reflect a more creditworthy borrower.

References:

  1. “Credit History”. Accessed July 12, 2016 Investopedia.com
  2. “What is a Credit Bureau?” Accessed July 12, 2016 https://www.investopedia.com/terms/c/creditbureau.asp
  3. “What is a credit report?” Accessed July 12, 2016 https://www.investopedia.com/terms/c/creditbureau.asp
  4. “What is my FICO Score?” Accessed July 12, 2016 https://www.myfico.com/crediteducation/whatsinyourscore.aspx
  5. “What is Debt Collection?” Accessed July 12, 2016 https://credit.about.com/od/debtcollection/a/whatcollection.htm
  6. “What is a Credit Score?” Accessed July 12, 2016 https://www.creditkarma.com/article/credit-score-factors