Credit History: What It Is and How To Establish It Safely
The next time you apply for credit, your lender will ask for permission to pull your credit history. Most likely, you’ll give permission, even if you’re not too sure what exactly your credit history is. Fortunately, we’ve developed this guide to help you learn more about this topic. It starts by defining credit history and then lets you know how to access it (when you have some). Finally, it discusses a plan to establish credit history in a responsible way.
What Is Credit History?
Your credit history is the collection of information detailing how you have used borrowed money (credit). If you have ever had a credit card or a loan, you have credit history. It reflects how many and what types of account you’ve had, and if you pay your bills on time. Your records show your account status and balance at the time when it was requested. It lists the credit limit or amount of the loan, minimum payments, and your payment history. Your credit history notes the companies that have lent you credit. It also reveals the companies who have requested your credit information, including lenders who pulled your information for marketing purposes. Bankruptcy, lawsuits for unpaid loans, foreclosures, repossessions, and liens all show up here. Despite the wealth of information in your credit history, it doesn’t reflect some key demographics about the credit user. Gender, race, ethnicity, income, and whether or not you are on government assistance are not mentioned.
Credit History and Credit Score
When we talk about credit history, we often mention credit scores too. Your credit score is a numerical representation of your credit history. It ranges from 300 (Very Bad) to 850 (Excellent). Lenders like higher scores because they indicate responsible credit usage. Credit issuers reward responsible consumers with better credit card and loan terms. A good credit score will get you a lower interest rate, more exclusive credit cards, and nicer bonuses and perks.
FICO Credit Score
There are many types of credit scores. The most popular version used by lenders is the Fair Isaac Corporation (FICO) score. Your score is determined by what you do with the credit you already have: that is, your credit history. The FICO score is broken up into 5 major components.
- Payment history (35%). Focuses on how you repay your loans, and if you’re paying your bills on time.
- Amounts owed (30%). Determined by your utilization (the ratio of how much credit you’ve used to the total credit you have available). Lenders assume high utilization on one or all of your credit accounts must mean you don’t manage your money well.
- Length of credit history (15%). A long credit history can show regular payment patterns better than a short one. Lenders view long patterns favorably.
- New credit (10%). Influenced by how often you open accounts. Too many opened over a short space of time makes lenders concerned about your ability to repay credit.
- Types of credit used (10%). Looks at the types of accounts you open. Having diverse accounts can showcase how you manage different types of credit.
A credit history has significance beyond your next credit card or loan. Your future landlord, employer, and insurance company may pull your credit before approving your application. Landlords want to know if you would pay on time every month. Your credit history provides evidence of your payment habits. Federal law allows your future employer to view some of your credit details to decide if you’ll get the job. Your credit history implies your reliability, as well as to which companies you are indebted. Your insurer assumes that a customer with a good credit history takes fewer risks. They may use your information to give you lower premiums. Having good credit history rewards you beyond credit cards.
How Can You Check Your Credit History?
If you want to see what your credit history looks like, you’ll need to request a credit report. This is just a summary of all your credit activities over the last seven to ten years. It holds your name, your current addresses, social security number, and credit history. If you have lived at your current address for less than 5 years, it may list former addresses too.
Once every 12 months, you can get your credit report for free. To request a report, go to AnnualCreditReport.com, fill your information and select the reports from the companies you choose. This website requests your credit report from the three most common sources: Equifax, TransUnion, or Experian. Residents of Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey, Puerto Rico and Vermont are eligible for an additional free report.
Errors In Your Credit Report
It’s advised that you check your credit reports annually to ensure that they’re correct. The best case scenario is that everything is as it should be. Errors in your credit history will bring about trouble. Lenders may use the negative parts of your history against you when applying for a new credit card or loan. Negative information stays on your report for seven years, unless it’s a bankruptcy (which stays on for ten years). If a criminal opens credit accounts with your information, you are financially responsible unless you can prove fraud occurred.
Clearing up your credit report with the lenders and the credit bureaus is painful and can take years. The first thing you must do is contact the lender or credit bureau(s) about the error in writing. This triggers a mandatory investigation. Send any evidence you have to the credit bureau and lender. Should the investigation reveal you were correct, the credit bureau is obligated to remove the error from your credit report.
How To Establish Your Credit History Safely
There is a silver lining if you don’t have enough credit history. You can build good credit history and avoid mistakes that can cause expensive financial penalties from lenders later.
If you are fiscally trustworthy, and a family member has good credit, you may be able to benefit from this. Ask to become an authorized credit card user on their account. With this, you can use the credit of the primary cardholder to build your history. Alternatively, you may ask your family member to cosign a loan. You are primarily responsible for the loan, but your cosigner becomes responsible if you don’t pay it back. When asking your family member to add you to their account, you should discuss the card usage, and repayment terms. If you are fortunate enough to have this option, use their credit responsibly to protect their financial credibility.
There are other alternatives you can try. Some banks offer a credit-builder loan. Once the loan is approved, the bank holds it in an account while you make payments. During this period, your payment behavior is shared with the credit bureaus. Once the loan is repaid, you can access the money. Another idea is a store card. While store cards may come with higher interest rates, they have easier qualification criteria. More importantly, if you pay your bill on time and in full, the interest rates may not even become a factor. Some utilities report their customer’s payments to credit bureaus. Ask your utility companies if they do this. If your landlord is willing, you may be able to convince them to report your rent payments to credit bureaus. If needed, they can do so via a couple of apps.
6 Important Steps to Build Your Credit History
In general, the following plan can build credit history that is robust.
- Get a job (or steady income). Lenders want to see that you have the ability to repay the credit that you use. Having regular paychecks reassures them that you are able to make the payments.
- Apply for a secured credit card or a student card. A secured card performs just like a regular unsecured card. The only difference is that you have to give a security deposit when applying for the secured card. This deposit is used to cover your bill if you fail to make a payment. As you use the card, the issuer reviews your credit card behavior. When you have shown a reasonable pattern of good behavior, they will convert your card to an unsecured one. At this point, your deposit is refunded to you, and you may qualify for better card benefits. If you are currently enrolled in school, you can apply for a student credit card. You usually won’t need a deposit. On the other hand, you will also have fewer perks and a lower limit than an unsecured card. Applicants under 21 may also need a cosigner for a student card.
- Use your credit responsibly. Keep your credit card balance low. Use your credit card for a few small purchases or to autopay for an inexpensive monthly subscription. Then, pay off your bill on time every month. This can quickly evolve into a pattern of excellent credit card responsibility. Recall that 65% of your credit score is based on your payment history and amounts owed.
- After a year or two, apply for a new unsecured card. Waiting at least a year to open a second card gives you time to establish a responsible credit pattern. This increases your odds of being approved. Once you have the card, use it responsibly.
- Don’t get credit crazy. You want to ensure that you can manage the credit you do have. We recommend that you keep 3-4 cards in your possession. Once you open these cards, you will want to keep them as long as possible. Length of credit history accounts for 10% of your credit score.
- Check your credit reports annually. Monitor your credit report for mistakes and discrepancies. Should any errors show up, contact your lender or the credit bureau in writing immediately to get it corrected.
Make Your Credit History Better
Your credit history is an extremely important asset to protect for your financial wellbeing. It is directly connected to your credit score, which can affect your insurance, your employment, and where you live. Strong credit histories save you money because lenders trust that they’ll get back the money they’ve lent to you. As a result, they’ll charge you lower interest rates, offer you better terms, and grant you access to more credit. Conversely, weak credit histories are expensive because you aren’t able to demonstrate the same financial trustworthiness. If you’re going to have credit history, you’re better off establishing a good one.
If your credit history is not so great, we haven’t forgotten about you. You should check out our article entitled “Raise Your Credit Score With These Moves.” In it, we’ll talk about ways you can make your credit history better.