Some people have a long credit history. Other people have a short credit history. And there are people who have no credit history at all.
As the name implies, your credit history tells the story of how you’ve managed your money over time.
Do you have a loan from a bank? How about a credit card? If you answered yes to either question, you have a credit history.
An understanding of your credit history, credit report, and credit score gives you valuable information when you seek a loan. Potential lenders will look at it when making decisions about approvals and interest rates. It’s in your best interest to understand your own credit history and how it may impact your financial goals.
Some (but not all) of the many questions answered in your credit history include:
- How many loans do you have?
- How many credit cards do you have?
- How many loans have you paid off in the past?
- How many credit cards have you closed?
- Do you pay your bills on time?
How do you build a credit history?
Simply put, lenders and other companies collect information regarding your finances (see above).
From there, this information is reported to the credit bureaus. Subsequently, this leads to the creation and management of your credit report.
As a collection of your credit history information, your credit report can list things such as:
- Your full name (and any names you have used in the past)
- Address
- Social Security number
- Loans
- Credit cards
- The balance owed on loans and credit cards
- If you pay your bills on time or late (including loans, credit cards, utilities, etc.)
What is your credit score?
In addition to the basic details associated with your credit history and credit report you also want to keep an eye on your credit score.
Based on your credit history, your credit score is calculated by the credit bureaus. Here are some things to know:
- Credit scores may range from 300 to 850.
- The better your credit history, the higher your score.
Your credit score may differ from one bureau to the next.
Things that may help your credit score
If you have room to improve your credit health, there are several steps you can take that may help:
- Keep balances low on credit cards and other forms of revolving credit.
- Don’t open a new credit card unless you absolutely need it.
- Pay your bills on time.
- If you have slipped behind on an account, catch up and stay current in the future.
Generally speaking, good financial habits may eventually lead to a higher credit score. If you want to be proactive, the five tips above are a good place to start.
Things that may negatively impact your credit health
Just as there are things you can do to improve your credit health, there are factors that can have a negative impact:
- Missing payments
- Neglecting to make payments on time
- Having an account sent to collections
- Filing for bankruptcy (both Chapter 7 and Chapter 13)
- Defaulting on a loan
- Losing your home to foreclosure
- Opting to sell your home via a short sale
- Maxing out your credit cards
- Closing old credit cards
While some of these behaviors could have a greater impact on your credit than others, it’s good practice to avoid them all.
How is your credit score calculated?
It’s important to understand how FICO® Scores are calculated. Below, myFICO explains that your score generally breaks down like this:
- 35%: Payment history
- 30%: Amounts owed
- 15%: Length of credit history
- 10%: Credit mix
- 10%: New credit
Of course, it’s not this black and white: Credit scores are unique. The importance of categories can change based on how long or short your credit history is, for instance. And your credit score will change over time, as your information changes.
Knowing where you stand financially
Your credit history and score can impact your finances in many ways, so it’s something to keep an eye on. Understanding what your financial situation looks like and how you can make changes to improve it can help you set and achieve your financial goals.
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