What is credit history?

Credit history is one of the biggest factors for determining financial opportunities, impacting everything from mortgage rates to personal loan terms.

Read on to learn about credit history, credit scores, and credit reports.

What does it mean to build credit history?

Building credit history involves establishing a record of borrowing behavior and debt repayment.

Below are examples of different types of credit accounts that help build credit history:

• Credit cards. Making timely payments demonstrates responsible credit utilization, which can lead to a better credit history.
• Installment loans. Financing plans, such as auto loans and mortgages, contribute to credit history by showcasing long-term financial commitment and reliability.
• Student loans. When managed effectively, student loans can also help to establish credit history.
• Retail accounts. Store credit and charge cards could also influence credit history depending on how frequently and responsibly cardholders buy on credit.
• Lines of credit. These flexible loan types reflect one's ability to manage fluctuating debt levels.

Understanding credit reports

A credit report is a document compiled by a credit bureau that outlines a borrower’s credit history. The main credit bureaus are Equifax, Experian, and TransUnion.

Credit reports include:

• Identifying information. The borrower’s personal details, including name, address, social security number, and employment information.
• Credit accounts and payment history. This section of a credit report lists all current and previous credit accounts held by the borrower, such as credit cards, loans, and mortgages, along with respective payment histories.
• Public records. Financial events, such as bankruptcies, foreclosures, and court judgments, are recorded in this section.

What are credit scores?

A credit score is a numerical representation of someone’s creditworthiness, which lenders use to make financial decisions, such as approving loans or setting interest rates.

There are numerous credit scoring models, with FICO being one of the most common. Others include VantageScore and Experian's PLUS Score, each with its own credit scoring system.

Factors impacting credit scores

• Payment history. Are bills paid on time? Late payments and delinquencies can negatively affect credit scores, so making on-time payments is critical.
• Credit utilization ratio. This measures how much available credit is being used. Lower ratios indicate responsible credit management.
• Length of credit history. Longer credit histories can contribute to higher scores, as they provide more data on borrowing behavior.
• Credit mix. Different credit types (e.g., credit cards, installment loans) can positively impact scores.
• New credit inquiries. Applying for new credit can result in hard inquiries, which may temporarily lower credit scores. Soft inquiries, used for background checks, loan pre-approvals, or promotional offers, usually don’t affect credit scores.

What is the impact of credit history?

Credit history can significantly influence various aspects of one’s financial life, including:

• Credit approvals and interest rates. Lenders use credit history to determine loan eligibility and credit terms, including interest rates and Annual Percentage Rate (APR). A positive credit history typically results in better loan opportunities and lower interest rates.
• Renting a home. Landlords will often conduct a credit check for renters to assess likelihood of renters making payments on time. A good credit score may make it potentially easier to secure a rental as a landlord may view the renter as reliable.
• Obtaining insurance. Some companies consider credit history when setting auto or homeowners insurance premiums.

Building a healthy credit history

Consider these tips to build a good credit history:

• Make timely payments on credit cards, rent or mortgage payments, and other loans or lines of credit.
• Maintain a low credit utilization ratio – utilization below 30% may help build good credit.¹
• Avoid opening too many new credit accounts in a short period, which can be perceived as risky behavior by lenders.
• Review credit reports for inaccuracies regularly. Individuals can typically obtain free credit report monitoring from major credit bureaus like Equifax, Experian, and TransUnion through websites like AnnualCreditReport.com.

Resources for managing credit

Non-profit credit counseling agencies can provide financial guidance on managing debt, improving credit, and developing a budget. Reputable organizations like the National Foundation for Credit Counseling (NFCC) and the Consumer Financial Protection Bureau (CFPB) also provide credit education and financial literacy resources. Those seeking financial advice should contact an expert suited to their own individual needs and circumstances.

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