When credit history is discussed, it's about how you handled debt in the past and your current finances. Read on to learn how your previous credits or loans influence your present-day requirements and if you can enhance creditworthiness by maintaining a good credit history.

What Is Credit History?

Credit history is a record of how you manage your money and debt, including loans, credit card accounts, and others. The Federal Trade Commission states that your credit history begins with an application for a loan or credit card. As you use the financial product and pay your balances, the lender will report your account activity to the credit bureaus. For instance, your credit card issuer could report the date you opened the card, your balance, and your payment history. When the credit bureaus receive the information, they add it to your credit reports.

Those reports are used to determine your credit score by companies like FICO® or VantageScore®. Lenders also use the information and scores to evaluate your creditworthiness.

Why Is Credit History Important?

Credit history is an essential component of credit reports and directly influences your credit score. Good or bad credit history is more crucial than you think and will benefit or harm you on multiple occasions. For instance:

• Landlords consider looking into your credit history to know your creditworthiness before agreeing to lease.
• Banks and insurance companies use credit history to know your credit score. They decide the interest or credit limit and insurance rate based on your repayment ability.
• Employers check credit history to validate your identity. It also gives information on your credit behavior. You could be passed for a job if your history is bad.

How Does Credit History Work?

The major credit bureaus, Experian, TransUnion, and Equifax, allow third parties to view your credit history through credit reports. These bureaus record each credit transaction and loan to calculate your credit score. With every delayed payment, you receive a negative mark on your credit history, affecting your overall credit report.

You can categorize credit history into three types:

1. Good Credit History

As the name suggests, a good credit history proves you are responsible for your finances. It shows you can manage debts efficiently by paying bills on time, repaying loans, and keeping the balance on your credit cards low. You get better loan offers with lower interest rates if you have a fair credit history.

2. Bad Credit History

Bad credit history implies that you may be unable to pay debts on time and indicates delayed or missed payments or poor financial events like bankruptcy, repossession, and charge-offs in the past. Moreover, it adversely affects your credit score, making it difficult for lenders to grant you loans.

3. No Credit History

People with little to no existing credit have no credit history. College students, young adults, and recent immigrants usually come under this group. They are often known as credit invisible since they do not have enough credit history to have a score.

What Is a Good Length of Credit History?

The length of your credit history accounts for about 15% when calculating your credit score. The age or length of credit history refers to the duration you have been using credit. Long and positive credit history makes you a better candidate for loans or credit cards. Many people with a good credit score between 800-850 have an average length of credit history of 99-128 months.

What Does Credit History Show?

Your credit history summarizes your financial information like:

• The number of open or closed credit accounts you have
• Timeline of when you opened the accounts
• Your payment history
• Amount you owe
• Your available credit
• Information about bankruptcy, judgments, collections, or liens

Credit History Example

Let's look at a few examples to understand how a credit history impacts your financial choices. Jeff wants to buy a home. But he will have to take out a loan to meet the required funds. Jeff is familiar with how loans work, as he received a car loan and mortgage earlier. He had repaid all the loan installments with interest on time. Moreover, he always pays his monthly payments. He now has a good credit history. This helped him to explore home loan refinancing choices and opt for the one with lower interest rates.

Let's consider the other scenario where Jeff is irresponsible. His mortgage is due, but he still squanders the money. His haphazard expenses will result in bad credit history, further tarnishing his credit reports. When he approaches a bank or any financial institution for a loan next time, they might reject his loan application after seeing his previous handling of the mortgage.

Credit History vs. Credit Score

There is a relationship between credit score and credit history. A credit score is a three-digit number signifying your creditworthiness. It's calculated using the information available in your credit reports, including several aspects of your credit history. The base FICO® Scores range from 300-850. Your score determines your ability to pay bills and loans.

Multiple factors play a vital role in calculating your score, for instance, payment history, credit utilization, age of credit, type of credit, total balances, debts, recent credit inquiries, available credit, etc. However, all these factors make your credit history. In a way, prioritizing your credit history will automatically lead to a better credit score.

Who Uses Credit History to Determine Credit Score?

The Credit Reporting Agencies (CRAs) analyze consumers' borrowing habits and draft credit reports. FICO (Fair Isaac Corporation) developed a strategy to help lenders estimate any potential risk a borrower may be. FICO presents a borrower's creditworthiness in scores ranging from 300-850. Companies, financial institutions, and lenders use these scores to measure your ability to repay the loan or services and substantiate your identity.

How Do Lenders Use Your Credit History?

Potential lenders evaluate your credit history to project your repayment ability. They use your previous credits to gauge if there is any credit risk in lending you funds. Further, it assists in settling an interest rate or insurance return based on your earlier credits.

The Fair Credit Reporting Act (FCRA) lists multiple potential lenders or businesses who can access your credit history from the credit reports to analyze the risk you carry, like:

• Banks
• Insurance companies
• Landlords
• Utility companies
• Employers

Conclusion

Credit history influences your financial life. In this aspect, financial life entails repaying debts and loans on time, making monthly payments, maintaining fewer credit accounts, avoiding borrowing funds promptly, and so on. And lastly, you can improve your credit history as it entirely relies on your actions. You can check your credit report to view your account, stay on track with your progress, and ensure the data's accuracy.