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What is Credit History?

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Anyone that has taken on debt has what is known as a credit history. Credit bureaus keep records of your credit history to determine whether you can pay off your debt on time. Lenders will then use this information when deciding whether to issue you a loan.

Your credit history will impact your chances of getting approved for a loan as well as your credit limit. If you have a bad credit rating, you may also have to pay a higher interest rate, increasing debt. If you are buying a home for the first time  or making a major purchase, how credit ratings work should be important to you. If you are thinking of applying for a loan, use this guide to improve your credit history and save money.

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Yellow notepad with pen svg icon Lesson Notes:
  • Your credit history is a measure of your ability to repay debts on time.
  • Creditors and lenders assess your credit history when evaluating your application for a loan.
  • It includes all debts owed, the duration and type of the loan, how much credit you have left, whether you pay your monthly bills on time and other factors that can affect your standing with creditors.
  • Learn how your credit history affects your chances of getting approved for a loan.

Credit history definition

Your credit history includes several different factors, but it’s essentially a measure of your ability to pay your debts on time. This rating can include credit cards, student loans, mortgages, auto loans and other types of debt.

Once you take on a debt, you will start creating a history of credit. Your history or rating reflects your current standing with creditors. If you have a lot of outstanding debt, you will likely have a poor or bad credit history. If you have already paid your debts or have little outstanding debt, you will likely have a good credit history.

Most of us will take on debt at one point or another. We typically pay off our debt by making regular monthly payments. Every payment can influence your credit history which is why it’s important to pay your bills on time. New consumers, especially students, often have no credit.

In addition to your ability to repay your debts, your credit history also includes:

  • The duration of the loan.
  • The amount of available credit.
  • The number of recent hard credit inquires.
  • And whether you have any bankruptcies, liens, collections or judgments.

It’s always best to pay off your debt as soon as possible. Carrying around debt for long periods of time, such as years or even decades, can be a bad sign to creditors. If you have a credit card or line of credit, it’s always best to avoid hitting your credit limit. It’s also important to be aware of hard credit inquiries. A hard credit inquiry is when a lender pulls your credit history when evaluating your application for a loan. Frequent hard credit inquiries will likely have a negative effect on your history.

Different types of credit history

Good credit

Part of having good credit means having a history of paying off debt on time. This rating means you have taken on debt in the past and were able to pay it off entirely or continue to make regular payments. You may even have paid more than what’s necessary every month. If you have a credit card, you rarely use more than 30% of your available credit. If you have a good credit history, you likely won’t have trouble getting approved for a loan. You typically won’t have to pay as much in interest, and you may also be able to access a higher credit limit.

Bad credit

Having a large amount of outstanding debt could negatively impact your credit. You may not have paid your bills on time or continued to max out your credit cards. This rating may also be a sign that several creditors have recently pulled your credit history. You may have had a bankruptcy, lien or judgment placed against you by a creditor or debt collector. If you have a bad credit history, you likely won’t get approved for a low-interest loan. You may get denied by various lenders or have to pay a higher interest rate. It is also likely that you will also have a lower credit limit.

No credit

Everyone has to start somewhere. Students and new consumers often have little to no credit to their names. Having no credit history can make it difficult to get approved for a loan. You will need to take on small amounts of debt and pay it back in time to develop a good credit history.

Fixing your credit history

It’s important to check in on your credit score and take steps to maintain or improve your score. You can request a free copy of your credit history once a year by visiting FreeCreditReport.com. Your score will be provided by one of the three major credit reporting bureaus: Equifax, Experian or Transunion.

If you have bad credit history, improving this score can take time. To increase your score, do your best to pay your bills on time, not only now, but for years to come. Consider paying more than necessary every month to show creditors that you can pay off your debt on time. If you cannot pay more, consider making your payment ahead of schedule. A great first step is to set a budget to focus on paying off your debt. Financial advisors are a great resource to get started with this step and reduce your stress. You can also look into how to consolidate your credit card debt to lock in a lower interest rate.

Experts recommend paying more than necessary every month rather than paying off your loan using a single lump sum. You may love the idea of getting rid of your debts with one click, but creditors like to see consistent financial responsibility.

For a more immediate fix, consider contacting a credit repair company. They may be able to remove some of your activity from your credit history. If you have no credit, you can also take out a credit card with a low credit limit or a pre-paid credit card to develop a good history.

Your credit history is a big part of your financial identity. To be better prepared for major life events or purchases, you may want to work on improving your credit score now. Contact our financial coaches to learn more about money management and the smart decisions that you can make every day to improve your financial life.

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