What Is Credit History?
Credit history by definition is a reflection of how you have been managing your debts in the past. These debts can be an accumulation of personal loan balances or credit card payments.
It is a crucial part of your credit report and carries all the essential information about your finances. Moreover, it allows a lender or other institution to gain insights into your financial credibility.
Credit history refers to how you have been managing repayments in the past. It is a crucial component of your credit report.
Credit History Definition
Industry experts define credit history as your financial activities in the past.
Below given is a list of information that a history comprises:
- Details of all the credit accounts under a person's name
- History of credit accounts
- Amount payable
- Credit utilized
- History of bill payments
- History of credit inquiries
It also contains information about your financial situation. If you are bankrupt or expecting any collections, liens, or judgments, everything will be available on your credit history.
How Credit History Works?
Credit history is a crucial factor in determining whether a potential borrower is capable of repayments and should receive a loan or not. This process is also known as a "credit history check."
These reports summarize the overall credit activity of the prospect. The system then, using the credit report, assigns a credit score to the borrower.
Your credit history is directly proportional to timely payments but inversely proportional to the time you take to clear the overall debt. For example, if you borrow an amount and request to pay back in installments, then having a more extended installment plan and making each installment payment on time will lead to positive marks in your credit history.
It is important to remember that installment payments comprise the principal amount plus interest amount. If you pay the principal amount but carry the interest amount forward to the next installment, your debt can grow and negatively impact your score over time.
No Credit History?
There are a lot of applicants who do not have a credit history. It is because they have been staying away from credit purchases or borrowing in the past.
Zero credit history can become problematic given creditors will not be able to identify the applicant's financial management skills. Accordingly, these creditors might decide to deny the applicant's request. A landlord's decision to decline a tenant is a classic example of this situation.
In such instances, a credit card or personal loan may be the most beneficial solution to help you build credit. You can obtain these services for a smaller amount to show use and demonstrate to potential lenders or creditors that you know how to manage your credit.
Credit History Vs Credit Report
If you look at the two, you will find that both the credit report and credit history are interconnected.
Credit reports are reports that a credit bureau generates after collecting information about your history. While your history reflects on your financial status and activities, a credit report is a summary of your actions.
You should always remember that your history helps determine your score on the credit report. If you have been careful with your finances in the past, it will lead to positive points for your credit score and hence your credit report.
You can collect your credit report from a credit bureau for free once annually to keep track of your past activities. It also allows you to identify any errors in your report and correct them in time.
Why Credit History Is Important
Credit history works like your other identification. It is one of the significant factors that help in building your credibility. Institutions such as banks, private lending companies, landlords, or employers often seek help understanding your creditworthiness based on your credit history.
A positive history leads to higher credit scores, which increase your chances of striking a better deal in comparison to someone who has a lower score.
If you are new to credit, it is vital to understand how the system works. A strong history and credit report are essential for improving your borrowing chances, employment opportunities, or tenancy acceptance. Your history is your liability report, which acts as a trust factor between you and the second party.
If you are unsure how your credit history reflects on your application, request your credit report from a financial bureau to see where you stand. It is always best to improve your history before you miss out on an opportunity.