Key takeaways
- Your credit history is a record of how you have managed your credit accounts, and it helps establish your creditworthiness to lenders.
- Your credit report contains input on your credit accounts and payments, and it helps establish your credit history.
- Your credit score is a numerical rating of your creditworthiness based on your credit history.
- You can improve your credit score by making responsible use of credit, such as paying your bills on time.
Your credit history provides a look at how you have managed your credit in the past. If you will be on the market shopping for a loan, such as a home mortgage loan or a car loan (or even looking for a rental or a job), it will serve you well to become aware of your credit history. You can then do what is necessary to clean it up before you apply.
What is credit history?
You can think of your credit history as a financial record of your credit activity. It includes whether you pay your bills on time, how many credit cards you have, what types of credit you use and how much debt you carry. It is recorded in a document called a credit report.
Credit reports provide information about how you use your credit accounts, including your payment history and account balances. They also provide your identifying information, details on any collections and bankruptcies on your record, and information about credit inquiries. If you haven’t paid any child support or alimony you owe, that negative input could also end up on your credit report.
Three major credit bureaus — Equifax, Experian and TransUnion — generate credit reports. They do not always record the same information in the same format.
Each bureau uses one or more scoring models — typically FICO or VantageScore — to interpret the information it has collected and create your credit score. FICO is the most commonly used credit scoring model.
The information on your credit report goes into a mathematical model that generates your credit score, which is a number between 300 and 850 that indicates how likely you are to pay off your debt. Because each credit scoring model has its own method for evaluating different criteria, your credit score with each one may vary. However, each model is attempting to do the same thing: predict your likelihood of repaying your debts. So, responsible financial behaviors will translate to a good score on both models.
Using a report card analogy, your credit report would be the report card document itself, with information about how you did on all of your assignments for a semester. Your credit score would be an overall letter grade, such as an A+ or a D.
It’s important to note that you won’t find your credit score on your credit report. To see your numeric credit score, rather than the information that goes into it, you can purchase it directly from one of the major credit bureaus or use a free credit score service from a credit card issuer such as American Express or Capital One.
Why credit history is important
Lenders use your credit history to determine whether to approve you for a loan or a credit card, as well as the size of your credit limit. Your credit history also influences the interest rate or cost of the loan you would be eligible for.
Ted Rossman, senior industry analyst at Bankrate, says, “Even if you’re not in the market for credit right now, some employers check credit reports, and it’s common for landlords, utility companies and cell phone providers to check credit scores. Building and maintaining a strong credit score will serve you very well in life.”
Say you have a limited or no credit history because you’ve never used credit or just started (a situation many young consumers experience). If you apply for a top-tier rewards credit card to help, you will likely be turned down due to insufficient credit history.
On the other hand, a long credit history full of on-time payments and responsible credit use can help you qualify for the best credit cards or secure a mortgage at a favorable interest rate.
You can get a full picture of your credit history by ordering your credit reports from the three major bureaus. You are entitled by law to a copy of your credit report for free from each of the three credit bureaus once a year (until the end of 2023, the credit bureaus are providing a free copy each week to help people recover from any pandemic impact). Remember that these reports don’t provide your score for free, and that you’ll need to purchase it from them or get it for free from credit card issuers and other services that provide it as a customer benefit.
Reviewing your credit report can help you better understand your financial challenges and areas that need improvement. It’s also good to ensure the information is correct. Sometimes credit reports can contain outdated or incorrect information which can wrongly prevent you from receiving access to credit, loans and good interest rates.
How to improve credit history
Here are some best practices to build your credit score and establish a strong credit history:
- Pay all of your bills on time. Your payment history, which reflects whether or not you pay your bills by their due date, accounts for 35 percent of your credit score. Late payments will drag your score down. If you have a history of paying on time, you can reach out to your creditor via a good faith letter and ask it to remove a rare late payment from your credit report. This may or may not be successful, but it’s worth a try.
- Keep your credit card balances low. The amount you owe compared to the total credit available to you accounts for 30 percent of your credit score. The less debt you carry, the better your score is likely to be. Generally speaking, it’s good to use no more than 30 percent of your available credit. Strive to pay your accounts off in full before the end of every billing cycle, if possible. Since your credit utilization is typically calculated as of your statement date, making an extra payment before then can help bring it down.
- Keep your oldest credit card account open. The length of your credit history — or, how long you’ve been using credit — makes up 15 percent of your credit score. A longer history is better for your score. That’s why, although it may seem wise to close inactive accounts, it’s a good idea to keep them open because they contribute to your length of credit history and bring down your credit utilization. Closed accounts that are in good standing generally stay on your credit reports for 10 years. It’s okay to close an account if it’s racking up unnecessary fees or causing confusion, but otherwise consider keeping it open and using it once in a while.
- Don’t apply for many credit cards within a short frame of time. New credit accounts for 10 percent of your credit score. This factor considers the number of new credit accounts you’ve recently opened, as well as the number of recent credit inquiries you’ve made. It’s best to keep these to a minimum. However, when you’re shopping for a big loan such as a mortgage loan or car loan, you do have a “rate-shopping window,” which is a period of time within which multiple credit inquiries will be factored into your credit score just once.
- Consider becoming an authorized user on a parent’s or spouse’s credit card. When you’re an authorized user, the primary cardholder’s activity often gets added to your credit report. This is a great way to build credit if you’re starting from scratch.
Having a diverse portfolio of credit is another positive for your score. Your credit mix makes up 10 percent of your credit score and accounts for the different types of credit accounts you have, including revolving debt (like credit cards) and installment debt (like student loans and mortgages).
You could also turn to alternative credit building tools such as Experian Boost and eCredable Lift, suggests Rossman. These types of services can give you credit for things that haven’t historically counted toward your credit score, including rent payments, streaming service subscriptions and utilities.
The bottom line
Your credit history is a record of how well, or not, you have managed credit that lenders have extended you. Lenders can see this record on your credit report, which contains information on your credit accounts, such as payments, and any negative impacts, such as delinquencies and bankruptcies.
You should check your credit report occasionally to make sure that your information is accurate. This is important since lenders will get an idea about your creditworthiness from your credit score, which is developed using input from your credit report. If your credit score isn’t as high as you’d like, engaging in good credit habits can help you to build your credit score.
Frequently Asked Questions (FAQs)
Your credit history is a narrative of how you’ve handled your credit accounts in the past. It is based on information on your credit report, such as how many accounts you have, how much of your available credit you are using and any delinquencies and collections you’ve experienced. Credit scoring models such as FICO and VantageScore use input from your credit report to build your credit score, which is like an overall grade for your creditworthiness. Credit scores range from 300 to 850.
Good credit history is a positive credit report narrative indicating responsible use of your available credit, such as paying your bills on time. Negative input, such as late payments, can stick around on your credit report for up to seven years and cast a cloud on your credit history. One exception is chapter seven bankruptcy, which can linger for as long as 10 years. You can get fraudulent or erroneous information removed from your credit report, but everything else generally stays for a set period of time.
