Understanding How Your Credit History Works

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Do you know the true meaning of your credit history? Do you know how it affects you and how you can build a better credit score? In this guide we’ll teach you all about credit history and credit scores so that you can maximize your history and scores, getting the results you need in your financial life.

What is a Credit History?

Your credit history is not your credit score. Your credit history is a record of your past debts and payments. It shows the amount of debt you carried, whether you made your payments on time, and the time the accounts have been open.

The credit history speaks volumes for lenders, sometimes more than the score. Looking at a person’s credit history, you can tell if they are in the habit of making their payments on time if they overextend themselves financially, and how many debts they have outstanding at one time.

Your credit history also shows whether you filed for bankruptcy, faced a foreclosure, have collections, or judgments against you. It’s a collection of your financial history from the moment you started adulthood until now.

Why is Credit History Important?

Your credit history is what lenders look at when making a lending decision. It’s also what employers, landlords, and insurance companies look at when making decisions. Yes, many look at the credit score too, but the credit history tells the story of your financial history. You want a positive credit history or story that tells lenders that you make good on your debts and don’t overextend yourself financially.

How do Credit Scores Work?

A credit score is a numerical representation of your credit history. Complicated software programs take your credit history and turn it into a score. The programs look at:

• Your payment history – 35%
• Current debt – 30%
• Length of credit history – 15%
• New credit accounts – 10%
• Credit mix – 10%

As you can see, your payment history is the most important factor next to the amount of your outstanding debt. You have three credit scores, one from TransUnion, Equifax, and Experian. The credit scores typically fall within a range as follows:

• 300 – 629 – Bad
• 630 – 689 – Fair
• 690 – 719 – Good
• 720 – 850 – Excellent

How to Get a Free Credit Report

According to federal law, you are entitled to one report from each of the three credit bureaus every 12 months. This means you can get a free credit report from TransUnion, Equifax, and Experian every year. You can get the reports from www.annualcreditreport.com.

You can pull all three credit reports at the same time or pull one at a time. If you spread out when you pull the reports, you can check your credit every four months, covering the span of an entire year and then start the process all over again.

Checking your credit report doesn’t affect your credit score and it can help you stay financially savvy. Use the reports not only to check and see how you’re doing but also look for any errors or fraudulent activity. If you notice any errors or fraud, report the credit lines to the credit bureau immediately. You may also need to contact the creditors themselves to sort out the situation and remove the errors from your credit report.

The Best Ways to Build Your Credit Score From Scratch

If you’re just starting out, you may feel overwhelmed at the possibility of building a credit score. You need a credit history to get credit, so it kind of feels like a double-edged sword. Fortunately, there are easy ways to start building credit:

– Open a secured credit card – Credit card companies are more lenient with secured credit cards because you have to put a deposit down to get the card. Your credit line is equal to the deposit and if you don’t make your payments, the credit card company keeps the deposit. Using the card regularly will help build up your credit history, especially if you pay the balance in full each month.

– Pay your bills on time – Always pay your bills on time. This includes utility bills, insurance bills, and any other regular monthly bills. Some creditors report to the credit bureau, which will help you build a credit score.

– Become an authorized user – If you have a close family member that has good credit and uses his/her credit cards responsibly, see if you can become an authorized user on the card. Choose the card that reports authorized users to the credit bureau in order to increase your credit score.

– Get a store credit card – Once you’ve established yourself with a secured credit card, try getting an unsecured card. A store credit card is often easier to get, but you can only use it at the designated store.

– Get a regular credit card – Once you’ve established yourself for at least 6 – 12 months, consider applying for a regular credit card. Make sure you use it responsibly, paying off your balance each month and only charging what you can afford in cash.

Habits That Will Hurt Your Credit Score

Just as it’s easy to build your credit score, it’s also easy to ruin it. Check out the top habits that may hurt your credit score if you aren’t careful:

• Maxing out your credit card – Try keeping your outstanding credit card balance at 30% or less than the credit limit. This will have the greatest impact on your credit score.
• Keeping a high credit utilization ratio – Credit bureaus calculate your credit utilization rate by totaling your outstanding credit card debt and comparing it to your total credit limits. Again, keeping this number around 30% will yield the best results.
• Paying your bills late – Your payment history makes up 35% of your credit score. Make sure you make your payments on time or no more than 30 days late or it will affect your credit score.
• Closing old credit cards – Keep old credit cards open, even if you don’t use them. Your credit age gets younger if you close old accounts, which can damage your credit score.
• Failing to have a mix of accounts – Mix up the type of credit you have including revolving, installment, and mortgage debt to increase your credit score.

Take your credit history seriously and always check your credit reports for accuracies at least once a year. Taking responsibility and getting the information corrected will help your credit score, credit history, and your ability to secure future loans, employment, and insurance.

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Mahugu Nuthu is a content creator known for his compelling and well-researched business analysis. His blog MHGcode.com, provides insights and proven strategies for effective entrepreneurship, side hustle hunting, passive income pursuit, small business ideas, saving and tips on slashing costs.

This information is for educational and entertainment purposes only. The information that is shared on MHGcode.com shall not be interpreted or construed as financial, accounting, legal or tax advice and should not be acted upon without further professional advice.