Credit History

Many people are slightly confused about what credit history is. It's often talked about in vague technical terminology and often confused with other financial constructs that bear a similar name.

What Is Credit History?

This is a list of information related to you and your current (and previous) financial situation. It contains statistics and data on various aspects of your previous borrowing and repayments including:

1. Payment History - Whenever you default against a payment a note of it is made on your credit history. People who regularly miss payment deadlines are deemed to be higher risk than people who pay on time. How late the missed payment was is noted down on your history, along with some other metadata. The more missed payments you have, the worse your credit score will be. It is the most important factor used in determining credit worthiness.

2. Collections - If you fail to meet payments regularly your account will be sent to collections agencies to be recovered. When this happens it is noted down on your credit history as a derogatory mark. Accounts sent to collections are taken very seriously by potential lenders, and a derogatory mark can seriously reduce your ability to get credit. They are long term pieces of information, and in some cases, they stay on your credit history for up to ten years.

3. Available Credit - Every single line of credit that has been extended to you will be noted down on your credit history. When lenders are assessing someone's ability to repay the potential credit, it is important for them to see how much potential credit they already have. Credit cards, mortgages, and loans are all noted down. Much metadata is also included including the amount of credit extended to you, payment history, and even the amount of credit currently being used.

4. Inquiries - The frequency you apply for credit is used to determine your credit score. The impact of credit inquiries is minimal compared to missed payments or derogatory marks (and deduct a few points at most). The impact of inquiries reduces rapidly over time, and within a few years, they are totally removed.

There are two types of inquiries, called voluntary and involuntary (or hard and soft). A hard inquiry is where you have intentionally applied for credit, a soft inquiry is where lenders obtain your report for other reasons (for example pre-approved offers). A hard inquiry affects your credit score much more than a soft inquiry (which has almost no effect).

5. Public Records - If you have been taken to court over outstanding debts, this information is included on your credit history. Things like bankruptcy, judgements against you, foreclosures, and liens will all be included and can stay on your credit history for many years. They are taken very seriously by lenders.

What Isn't Credit History?

There are a few common misconceptions about other items that people believe to be on their credit history. Some things that are not included are:

1. Bank Accounts – Savings accounts, bank accounts, and checking accounts are not included in your credit history. The only exception to this is overdrafts. Overdrafts are credit attached to a bank account and as such are recorded on your credit history.

2. Identifying Information – The only pieces of identifying information on your credit history are your name, your social security number, and your date of birth. Despite common misconceptions no information is recorded regarding race, religion, and your current income. None of the identifying information that is collected about you is used to determine your creditworthiness or your credit score in any way. The information is kept up to date by lenders who receive your application for credit.

Credit history is also often confused with two other very similar terms which are related, but are entirely different:

1. Credit Reports – A credit report is the name given to the document that contains your credit history. The data on a credit report is collated and maintained by various national credit agencies and made available to potential lenders upon request for a fee.

2. Credit Scores – A credit score is a numerical figure given based upon the credit history contained in a credit report. The higher the number, the more creditworthy the individual is. They generally range from 300 (bad), to 850 (exceptional).

How Do Lenders Use It?

As we mentioned earlier, your credit history is collated into a document called a credit report which contains your credit score. Lenders use this score as an "at a glance" overview of someone's credit worthiness. In most instances this score alone is used to determine whether to provide credit, but on occasion lenders will look at the detail of your credit history to assess eligibility.

How Do I Improve It?

When assessing credit history lenders like to see a number of different things on the credit report, including:

1. Making Payments On Time – This is the single most effective thing you can do to improve your credit history. If you do not make payments on time, you will not have a good credit history. Ensure you meet payment deadlines without fail, even a single missed payment can affect your credit score for years.

2. Reduce Used Credit – The amount of credit you are currently using is stored on your credit history. It is important to note that this point refers to the percentage of your credit you are using, not the total amount of credit available to you. This information is not stored long term on your credit history – it is only provided as a current snapshot. So if you are using a large amount of your available credit, paying it off a month before an expected inquiry will improve your score.

3. Use Your Credit – Confusingly, it is also essential to actually use the credit that has been extended to you. This will create a long list of successful repayments over time, which is ultimately what potential lenders are looking to see. However, remember the point above, try and keep utilization below 50% of your maximum available credit.

We have an article with actionable tips on improvement of your credit rating.