What is a Credit History? How it Impacts Credit Scores and Lending Decisions

Your credit history is a record of your financial background, covering every time you’ve borrowed or repaid money. It includes information about credit cards, loans, collections, and bankruptcies. Lenders use your credit history to estimate how risky it is to lend you money. 

You’ll likely qualify for higher loans and lower interest rates if you have a good credit history. A bad credit history, however, may leave you in a financial bind. 

Similar to reading about history in school, you can study your credit history to gain essential insights into your financial past, present, and future. In this guide, we’ll cover how to view your credit history, its most important components, and what you can do to ensure your profile shines.

Learning about your credit history starts with understanding its contents and how lenders and other institutions use it. 

Key Components

The following table identifies the critical components of credit history and describes how each component impacts your overall creditworthiness. 

Some items, especially negative information such as bankruptcies or liens, can remain on your credit reports for up to 10 years. The most impactful metric is payment history, which can make up a large percentage of your credit score. Lenders report your payment information each month.

How Credit History is Used

Banks and financial institutions use your credit history to determine whether they can trust you to repay a loan or a new line of credit. Lenders can breathe easy when you have a good history of paying your loans. They can see you’ll likely pay the money back and not default.

Your credit history largely determines how much interest you pay on a loan is largely determined by your credit history. If you have good credit, it means that you are a low-risk borrower and can more easily manage a loan. Because your track record shows that you have been successful with prior loans, lenders assume you are a low risk.

A good credit history shows credit card issuers that you are a responsible borrower. Issuers use the information in your credit history to determine whether you qualify for their card, so a solid credit history can mean lower interest rates and better rewards. 

Your credit history also influences your qualification for other financial products, including mortgages and auto loans. A strong credit history can allow you to close on a loan with better terms and could even reduce your premiums when you renew your car insurance.

In summary, your credit history can influence your entire financial life. Your access to loans, credit cards, and other financial tools depends on your past use of credit and the record of your behavior. 

A credit report highlights your history of handling credit. If a lender considers giving you a loan, it will consider your credit report in its decision. Your credit score also helps the lender decide the rates and terms of your loan.

Credit reports contain essential personal information such as your name, current and previous addresses, Social Security number, and possibly some aspects of your employment history. They also contain detailed information on specific financial events, including defaults and bankruptcies. This information can help demonstrate your creditworthiness — or lack thereof — to potential lenders.

How Credit Reports Work

Creditors such as banks and credit card companies report your credit history to the major credit bureaus — Experian, Equifax, and TransUnion. Creditors furnish the information that the credit reporting agencies use to calculate your credit score. If you don’t have much credit history, it will reduce your ability to get a loan because lenders will view you as a high risk.

The bureaus gather this and other data about how you manage your credit. They then organize the information into your credit reports. When you want to borrow money, lenders usually request your credit report from at least one of the three major bureaus. The credit reporting bureaus make money by selling your credit reports to creditors.

You can access your credit report in several ways. You can get a free report directly from each credit bureau at least once a year if you want to check up on what information each has on you. You can also access your reports for free as often as once per week at AnnualCreditReport.com.

You must check your credit reports to ensure all your information is correct. Should you discover any mistakes, you have the right to dispute them. As discussed below, you may send letters to the credit bureaus and ask that the errors be fixed.

Credit Reports vs. Credit Scores

You should also understand the distinction between a credit report and a credit score. A credit report is an exhaustive record of your credit history. On the other hand, a credit score is a number that sums up your creditworthiness. Credit bureaus compute your credit score using the information on your credit report and credit scoring models.

Banks and other financial institutions use credit reports and scores to decide whether to lend you money. A credit report gives a complete account of your credit history for the last 10 years, while a score provides a quick overview of your credit risk. 

Types of Credit Reports

Credit bureaus create reports based on collected data. The reports vary depending on who requests them and from which bureau they come.

• Authentic Credit Reports are the actual credit reports lenders use. They are in a standard format called Metro 2, which is not readable by humans because it consists of complex data. Consumers cannot access these reports directly, but they form the basis for your credit scores.
• Credit Report Disclosures (Consumer Disclosures) are the reports you can access as a consumer. You can request them from AnnualCreditReport.com or directly from the three major bureaus. These reports are designed to be easily read and understood, often with color coding and explanations. These reports are not what lenders see.
• Credit Report Summaries are simplified versions of your credit report provided by some websites and apps. They contain less information than a full credit report disclosure. These summaries are often abbreviated and renamed by the companies providing them. Lenders do not use these reports.
• Residential Mortgage Credit Reports (RMCR), also known as tri-merge credit reports, combine reports from all three major bureaus. Mortgage lenders and brokers use them because they contain the most comprehensive information. RMCRs are not available to consumers directly, but mortgage brokers can give you a copy.

FICO and VantageScore Scoring Systems

The primary scoring system in the United States is the FICO score. FICO comes from Fair Isaac Corporation, which initially developed it. FICO scores range from 300 to 850, with lower scores meaning you present a higher risk to lenders. 

FICO scores are based on five key factors: payment history, account diversity, credit history length, total amount of debt, and recent debt inquiries.

The credit bureaus also use a jointly developed system called VantageScore. It is less critical than FICO but often reported to credit card holders. The second most popular credit scoring system, VantageScore, uses the same scoring range as FICO and has roughly the same tiers.

Your credit score is a snapshot of how likely you are to repay borrowed money. If you have a good to excellent score, that indicates you make payments on time. You’ll have a lower score if you fall behind on your loan payments. Lenders can make quick initial decisions about your credit using your snapshot computed by the credit bureaus, 

A strong credit history is the key to financial success. Banks and other lenders are more likely to lend you money because you are more responsible. 

However, some people need help borrowing cash because their credit history isn’t stellar. Many banks and other lenders are unlikely to give someone a loan if they have a poor credit history.

Having a positive credit history is a financial advantage. It allows you to obtain loans with fair interest rates. You can even be approved for top-tier credit cards that offer excellent benefits. 

But even if your credit isn’t great because of past financial troubles, don’t despair; you have various ways to rebuild it.

Better Interest Rates and Loan Terms

An excellent credit history can result in a borrower receiving a loan with a low interest rate. Suppose you have a valuable and lengthy credit history. In that case, lenders will see you as someone they can trust.

Establishing a positive credit history is the most accessible and consistent path to home and car loans. If you show a history of mismanaging credit by not making timely payments, or defaulting on accounts, it could take years to recover and qualify for financial products with better interest rates.

Easier Approval for Loans and Credit Cards

If your credit is good enough, you’ll get loans at much cheaper rates than if you had bad credit. If your credit isn’t where it should be, you can still improve it. However, building up a good credit history takes time. 

You can’t just approach a lender and say, “I have a great history of paying my bills on time! You can trust me!” You need to prove it, and that starts with making timely payments.

If your credit is good, acquiring better credit cards and higher lines of credit is much easier. Some of these cards come with even more beneficial perks, including promotional 0% APR periods or no interest on purchases for a certain number of months. After that, interest will accrue and be charged at a relatively low APR.

Job and Housing Opportunities

Good credit creates financial opportunities beyond just loans and credit cards. These days, many employers will also check new hires’ credit reports, especially if the applicants will manage money. 

Renters also face potential credit checks by landlords. Rental property owners typically prefer tenants with good to excellent credit, so you have a better chance of securing a rental if your score falls within those ranges.

If you want to establish a good credit history, the most important thing you can do is pay your bills promptly and in full. However, there’s more to building credit than just paying bills on time. Use the following strategies to help maintain and build your credit profile.

Regularly Review Your Credit Reports

Maintaining a positive credit history requires you to check your credit reports regularly. You want to know what prospective lenders see when they look you up. You should also know about any concerning info immediately, which justifies going straight to the source — the three major credit bureaus — to request your reports.

Some credit monitoring services, either free or paid, can help alert you to any negative items quickly. When you spot erroneous information, you have a better chance of correcting it before a lender brings it to your attention — when it’s probably too late. Refer to our article for more details about disputing credit report errors.

It’s wise to check your credit reports and contest any errors you may find. There is nothing like keeping a good relationship with lenders. When it comes to money, you want to be known as someone who pays back on time, and credit reports and scores show if you do.

Always Pay Your Bills on Time

Paying your bills on time is essential for maintaining a good credit history. Your financial life, especially your credit, depends on paying bills by their due dates. Even one late payment can harm your credit score.

Timely bill payments have many other long-term benefits. They help keep your credit score high, making getting approved for loans and credit cards with lower interest rates more accessible. This can save you a lot of money over time.

Creditors trust individuals who consistently pay bills on time, which increases your chances of being approved for loans and credit cards. This also means better interest rates and higher credit limits. Paying bills on time is the most important factor in your credit score for a reason, and it is critical to achieving your financial goals.

Keep Your Credit Utilization Ratio Low

Your credit utilization ratio is the percentage of credit you use compared to your total credit limit. For example, if you have a credit card with a $1,000 limit and a $500 balance, your credit utilization ratio is 50%.

Your debt makes up about 30% of your credit score, so keeping your credit utilization low is critical to maintaining a good credit score. To manage your credit utilization, avoid getting too close to your credit limit. Experts suggest keeping your credit utilization below 30%. For example, if you have a $1,000 credit limit, try to use no more than $300.

Here are some additional tips to help you manage your credit utilization:

• Pay off your balances regularly: Try to pay your credit card balances in full each month. If you can’t, repay as much as possible to reduce your balance.
• Increase your credit limit: You can request a higher credit limit to lower your utilization. But be cautious; some lenders may see this as a sign you need more money. If you request an increase, wait about six months before requesting another increase to show responsible usage.
• Use multiple credit cards wisely: Spread your spending across multiple credit cards instead of just one. This can help keep your utilization of each card low.

Maintaining a low credit utilization ratio can contribute to a healthy credit score. It also makes you more attractive to lenders, helping you get loans and credit cards with better interest rates.

Borrowing responsibly is the foundation of your credit history. If you are responsible with your debt, you’ll find dealing with lenders, landlords, and potential employers much easier. 

It is important to live within your means and to try to incorporate financial management into your lifestyle.