What’s a credit history, and why do I need one?

Your credit history is just that – a history of your credit activity. Most people begin building a credit history at a young age, typically as a result of credit card use. Why is it so important to understand and manage your credit history? Because those who have bad, insufficient, or no credit history may have limited access to credit, which can prevent you from making major purchases like a home or car.

Credit scores vs. reports

Your credit reports and your credit scores are two different, but closely related things. A credit report is a statement that has information about your credit activity and current credit situation, such as loan-payment history and the status of your credit accounts. Most people have more than one credit report. Credit reporting companies, also known as credit bureaus or consumer reporting agencies, collect and store financial data about you that is submitted to them by creditors (lenders, credit card companies, and other financial companies). Lenders use these reports to help them decide if they will loan you money, and what interest rates they will offer you. Lenders also use your credit report to determine whether you continue to meet the terms of an existing credit account. Other businesses might use your credit reports to determine whether to offer you insurance; a rental contract on a house or apartment; or cable TV, internet, cell phone service, or other utilities. If you agree to let an employer look at your credit report, it may also be used to make employment decisions about you.

Businesses might use your credit reports to determine whether to offer you insurance; a rental contract on a house or apartment; or cable TV, internet, cell phone service or other utilities.

Your credit score is one piece of information on your credit report, each of which is important for determining whether you’ll be able to get a mortgage, credit card, auto loan, or other credit product, and what kind of interest rate you’ll pay. Your credit score is calculated based on the information in your credit report. Higher scores reflect a better loan paying history, making you eligible for lower interest rates. It is important to be aware of your credit score and the accuracy of your credit report, as any errors on the report can have a negative impact on your score. The lower your score, the greater risk you are for lenders, which usually means a higher interest rate and less money in your pocket. That means it’s important to check your credit report and correct any errors well before you apply for a loan.

What is considered a “good” credit score?

A credit score is a number that is used to predict how likely you are to pay back a loan on time. A credit score of 700 or above is generally considered “good,” and a score of 800 or above is considered to be excellent. Usually, a higher score makes it easier to qualify for a loan and may result in a better interest rate. Most credit scores fall between 600 and 750. Some factors that typically affect credit score include:

• Your bill-paying history
• Your current unpaid debt
• The number and type of loan accounts you have
• How long you have had your loan accounts open
• How much of your available credit you are using
• New applications for credit, and
• Whether you have had a debt sent to collection, a foreclosure, or a bankruptcy, and how long ago they took place.

There are many companies that will provide you with your credit score for various prices, but you can check your credit score for free every 12 months by going to annualcreditreport.com.

Adapted from this article and this article by the Consumer Financial Protection Bureau

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