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What Is Credit History And Why Is It Important?

6-Minute Read
Published on May 26, 2022
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You've probably heard that in addition to guarding your credit score like a watchdog, you also want to build your credit history. But what is credit history and why is it important?

We'll highlight what you need to know about credit history. By the time you're done reading, you'll have a comprehensive understanding of credit score history and how to build credit history for yourself.

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What Is Credit History?

A credit history is a way for lenders to see how you've handled debt in the past. Lenders can take a look at credit history to determine whether applicants are worth lending to or if they pose a risk. 

Your credit history serves as a record of how you've managed credit in the past and the types of credit you have. Many factors affect your history. These include the number of outstanding loans you have, the number of lines of credit you have open and your payment history for each loan/credit card you have.

The types of loans also matter, whether you have an installment loan (a type of loan in which you borrow a fixed sum and repay it monthly during the repayment period) or revolving credit (credit that replenishes as soon as you pay off your debt).

Your credit history reveals any negative moves like delinquent payments, bankruptcy or whether you have any accounts in collections.

Is A Credit Score The Same As A Credit History?

Credit history is not the same as credit score.

Credit scores are influenced by the information contained inside your credit history. Your credit score shows information about your credit activity and credit history, including how well you've paid off debts to creditors in the past.

Credit bureaus, or credit reporting agencies, are companies that maintain information in your credit reports. TransUnion®, Equifax™ and Experian® are the three companies in the United States that collect information from your creditors.

Many lenders rely on the FICO® Score based on the results of information that comes from the three credit bureaus. The FICO® Score comprises data that includes the following areas: 

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • New credit: 10%
  • Credit mix (the types of credit you use): 10%

Why Is Your Credit History Important?

Credit history is important for borrowers because lenders consider it when reviewing loan applications. Short or nonexistent credit histories can make it more difficult for borrowers to qualify for loans.

Your credit history shows lenders how trustworthy you are when it comes to paying back what you borrow. If your credit history is good, lenders will be more likely to lend to you.

How Do Lenders Use Your Credit History?

Lenders use credit histories when reviewing loan applications. Individuals with longer credit histories are generally viewed as lower-risk applicants. Lenders use credit history to determine interest rates and loan terms and to gain a picture of your creditworthiness.

  • Interest rates: Your interest rate is the amount your lender charges for a loan based on a percentage of the principal.
  • Loan terms: Loan terms can include repayment period (for example, for a 30-year mortgage) and fees.

Insurance companies might also use your credit history to determine your insurance rates, employers may use it to determine whether to hire you, utility companies may even use it to determine whether they can provide services to you.

How Far Back Do Mortgage Lenders Look At Credit History?

We already know that mortgage lenders prefer to see a good credit score and lengthy credit history when someone applies for a mortgage. But how far back do mortgage lenders look at credit history?

Mortgage lenders prefer to see credit histories of at least 7 years in length. If borrowers have less established histories, they are at risk of not receiving a loan. After all, it's impossible for a lender to know whether you'll pay back any borrowed money if you don't have a way to prove through your credit history that you can do so.

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How To Build A Strong Credit History

Building a credit history takes work and, unfortunately, doesn't happen overnight. However, there are a few things you can do to boost your credit history, which we'll outline below.

Start With What You Can Afford

You may need to apply for some type of credit or loan to establish credit history. Stick to the rule of thumb that you should borrow no more than you can afford to repay. You may want to consider a few loan types that people with minimal or no credit history can use to build credit:

  • Secured credit cards: Secured credit cards require a cash deposit to open an account. This reduces risk for the credit card issuer. For example, you might put down a $200 deposit as collateral and in return, may receive a $1,000 line of credit. Eventually, you may be able to apply for an unsecured card if you make your regular payments.
  • Authorized user credit cards: As an authorized user, you can use a primary account holder's credit card. You'd have access to your own credit card connected to the primary user's account. As an authorized user, you can get on the account without having to fill out an additional application or undergo a credit check.
  • Credit-builder loans: Credit-builder loans are used to make fixed payments to a lender (which holds your money in a bank owned by the lender). At the end of the loan term, you get access to the loan amount.
  • Co-signed loans: Co-signed loans include someone else who agrees to take responsibility if you don't make your payments. It's important to choose a trusted individual to help you build a good credit history.
  • Student credit cards: If you're a college student, you can also apply for a student credit card. A student credit card typically offers lower credit limits and few incentives but gives you a good start toward building credit.

Pay Your Bills On Time

Credit histories put a lot of weight on whether accounts get paid on time. As mentioned before, one FICO® Score category includes 35% of your payment history. Pay your bills on time each month, even if you can only make the minimum monthly payment.

Late payments will show up on your credit history and can impact your credit score. They can also stay on your credit report for up to 7½ years, though the impact of the late payments decreases as time goes on.

Keep Your Accounts Open

The longer you hold accounts, the stronger your credit history will be. Avoid closing lines of credit whenever possible. This action can increase your credit utilization, which refers to the ratio of your total credit to total debt, expressed as a percentage.

For example, if you have two credit cards with a $1,000 limit on each and owe $500 on both, your credit utilization ratio is $1,000/$2,000, or 50%. You want to try to keep your credit utilization as low as possible.

Keeping your accounts open can prove a lengthier credit history, whereas closing them automatically shortens your credit history.

Review Your Credit Reports

Reviewing your credit reports is important because errors can affect your score. It's possible that your credit report could have incorrect personal information, incorrect accounts due to identity theft, account status inaccuracies (such as closed accounts reported as still open), balance or data management errors.

FAQ About Credit History

Let's take a look at the frequently asked questions about credit history.

Do I need to have a credit card to establish a credit history?

Credit cards aren't the only way you can start to establish your credit history. You can also consider building your credit history by applying for a car loan, by making regular rent payments, applying for a personal loan or making payments toward your student loans.

Do I need to monitor my credit history?

It’s important to monitor your credit history because errors can occur. Consider monitoring your credit history anytime you plan to review your credit scores or credit reports. This means looking at your credit reports for free from the major credit reporting bureaus, which you can do once per year.

Is it impossible to get a loan without an established credit history?

It may be more difficult to get a loan without an established credit history, but it’s not impossible. If you don't have a lengthy credit history, you may need to look into nontraditional loans like a credit-builder loan until it’s more established.

The Bottom Line

When you apply for a loan, lenders want to be able to see how you've handled debt in the past. Reviewing your credit history is a simple way for lenders to decide whether they want to lend to applicants.

On the other hand, as a borrower, you may also be curious about your credit history. Credit histories help borrowers get loans with great terms and make it easier to qualify for a mortgage when they’re ready to buy a house. Credit bureaus are the entities that collect and maintain your credit score information.

This information is compiled based on the following factors:

Mortgage lenders prefer to see credit histories of at least 7 years in length. If you haven't built up that many years of credit history, consider getting a secured credit card, becoming an authorized user on another credit card holder's account or obtaining a student credit card. You could also start out with a credit-builder loan or a co-signed loan.

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Melissa Brock.

Melissa Brock

Melissa Brock is a freelance writer and editor who writes about higher education, trading, investing, personal finance, cryptocurrency, mortgages and insurance. Melissa also writes SEO-driven blog copy for independent educational consultants and runs her website, College Money Tips, to help families navigate the college journey. She spent 12 years in the admission office at her alma mater.