Credit History Explained – Learn How Credit History Works
You have probably heard that it is important to build up your credit history in addition to keeping a vigilant eye on your credit score. But what exactly is a credit history, and why is it so crucial to have one?
In this article, we will focus on the most important aspects of your credit history. When you’ve finished reading this, you’ll have a complete grasp of the history of your credit score as well as the steps you need to do to establish your own credit history.
Why Does Your Credit History Matter?
As you may already be aware, the information contained in your credit history is responsible for the majority of the aforementioned elements that have an impact on your credit scores. Because of this, your credit history can eventually have an effect on whether or not a lender authorizes you for a credit card or loan, as well as the interest rates and terms that are provided to you.
Maintaining a low credit utilization rate and on-time payment history are both important components of a healthy credit history that can help you qualify for more favorable interest rates.
On the other side, having a credit history that is marked by missed payments or other unfavorable indicators might make it more difficult to get authorized for credit or to obtain advantageous interest rates or conditions.
What’s in Your Credit History?
Credit reports contain two basic types of data on you: personal details and a track of your credit history. Among the types of information that fall under the category of “personal information” are details like your name and address. As was mentioned earlier, the details of your credit history include data about how you handle and use credit.
Equifax, Experian, and TransUnion are the big three in the consumer credit reporting industry. Creditors and lenders have the option of reporting account information to one of the three major credit reporting agencies.
What Is Considered a Good Credit History?
Maintaining a decent credit score requires regular bill payments on time as well as other responsible debt management practices. Furthermore, what credit scoring organizations perceive to be good scores should be noted because credit history serves a part in credit reporting and scoring.
The good range, according to VantageScore, is between 661 and 780. With a score between 670 and 739, you have what FICO calls an excellent credit score.
It’s important to keep in mind that a high credit score is only an indicator of a financially responsible past. Moreover, it is the individual lending institutions, not the credit bureaus, who make the ultimate determinations about loan and credit approvals.
Even if there are flaws on your credit report right now, that doesn’t necessarily imply it will stay that way forever. Failing to make payment may remain on your credit report for as long as seven years after the date it occurred.
You can improve your credit score through responsible credit use. A positive credit history can be established by consistently making payments on time and maintaining a small amount.
How to Establish a Good Credit History
The length of time a person has been able to make payments on time and the total amount of debt constitute the two aspects that have the greatest influence on a credit score.
The two most beneficial actions you can take to improve your credit score are making on-time payments to your bills and maintaining a low balance on each of your credit cards; however, this is not everything you can do.
Building your credit history can be accomplished through the following five primary methods.
- Make sure that you are not late with any of your payments. This includes payments made on student loans, mortgages, credit card bills, and any other accounts that have credit attached to them.
- Maintain a low balance on each of your credit cards. Try not to run up large sums on your credit cards, and try to pay them off in full every month if at all possible.
- Don’t close down your oldest credit card. Keep dormant accounts open, even if the temptation to close them is strong; they help establish a longer credit history. If an account isn’t being used and is just accumulating fees or causing problems, it can be closed. Otherwise, you might want to keep it open and use it occasionally.
- You shouldn’t apply for too many cards at once. Lenders have the impression that it is high risk.
- You might want to think about adding your name as an authorized user to the credit card of a parent or spouse. When you are an authorized user of a credit card, the actions of the primary cardholder will be reported on your credit report. If you have no credit history to speak of, this is an excellent method to begin establishing it.
How to Build Credit with No Credit History
Building credit gives those without an established credit history a higher chance of being approved for loans and credit cards in the future. What follows is a list of strategies for initiating the process of establishing credit from scratch.
- Consider getting a secured credit card. Secured credit cards require you to put up cash as collateral with the card issuer.
The cash deposit is often between $300 and $500, and the credit limit is usually about the same amount. If the issuer of your secured credit card reports to any of the three major credit agencies, making your payments on time can help you improve your credit.
- Get a loan to improve your credit score. Credit-building loans work by delaying the release of borrowed funds until after the debt has been settled. The loan proceeds are initially placed into the lender’s account.
The regular monthly payments you make (which may include interest and other fees) are recorded by the credit reporting agencies and used to determine your creditworthiness. A debt is considered “paid off” when its balance is reduced to zero.
- Obtain user authorization. Someone close to you, like a parent or sibling, may enroll you as an authorized user of their credit card. Since the credit card is now in your name, you can use it and reap the benefits of any timely payments made on the account.
Ensure the main account holder is paying their bills on time before taking this course of action. They should also check with their credit card company to be sure that all three consumer reporting agencies are receiving information on authorized user accounts.
- Seek someone to co-sign the loan with you. You may want to consider getting a co-signer on a loan, such as a friend or family member. This also signifies that they accept legal and financial liability for the debt. It’s a chance they’ll have to take in order to lend to you, but it could mean better loan conditions or approval.
How to Dispute Any Mistakes on Your Credit Report
Accuracy in your credit report is important since it plays a role in determining whether or not you will be able to borrow money and how much you will have to pay for that money. It may also affect one’s ability to obtain employment or insurance, as well as the ability to rent a property.
The following is a step-by-step guide that will walk you through disputing inaccuracies on your credit report and having them deleted.
- Check for inaccuracies on all of your credit reports. Disputes against your credit report are free of charge and unlimited in number. Even if disputing won’t lower your score itself, the outcome of the dispute could.
- Collect evidence to refute any inaccuracies you find. Your goal should be to make it simple and quick for investigators to verify the validity of your allegation. Information you collect in support of your case may include, but is not limited to,
- Documents relating to a loan or a credit card statement
- Proof of funds via bank statements
- Certified copies of legal documents such as marriage licenses, death certificates, or divorce decrees
You’ll also need to supply the following:
- Identity documentation
- Date of birth and Social Security number
- Proof of identity (driver’s license, passport, etc.)
- The last two years’ worth of addresses, including your current one
- A recent bill or statement from your bank or insurance provider that displays your name and address.
- Dispute credit report mistakes. You can write a letter, or you can use the online dispute process that is offered by every credit agency. The online dispute process is typically the quickest option to resolve a problem. Although calling credit reporting agencies is an option, it’s possible that doing so won’t resolve your dispute immediately.
- Examine the response that was given to your complaint. Your dispute must be looked into by the credit bureaus, who will then provide you with a written report of their findings. In the majority of cases, the bureaus are required to give their responses within a month.
When you request for a loan, the lender will want to know how you have managed debt in the past because it will affect their decision whether or not to give you the money. Lenders can quickly determine if they wish to work with applicants by looking at their credit reports.
On the other side, as a potential borrower, you could be interested in learning about your past credit experiences. Borrowers with established credit histories have an easier time securing favorable loan terms and meeting mortgage qualification requirements. A person’s credit score is kept on file by credit bureaus.
The following considerations were taken into account when compiling this data:
- History of Payments
- Payment Due
- Credit Report Age
Lenders of mortgages are often looking for credit histories that are at least seven years long. Consider applying for a student credit card, acquiring a secured credit card, or becoming an authorized user on the account of someone else who already has a credit card.
These options are available to people who have not established a lengthy credit history. You might also begin with a loan that helps establish credit or a loan that is co-signed by someone with better credit.