Credit Card Guide

What is a Credit History?

28 November 2010 by CreditCardsCo™

Credit history or credit reports are a way to report the credit worthiness of a consumer or a company. What this means is that the credit reports contain data about the willingness and the ability of a consumer to repay loans and debts over a period of time (usually a year).

In the United States there are three credit reporting bureaus or agencies that receive and provide credit reports. These are Equifax, TransUnion, and Experian. The basis on which these agencies arrive at a credit score is a FICO score produced by a software developed by the Fair Isaac Corporation (FICO).

Credit Report Basics

A credit score is a snapshot of a consumer's credit risk at a particular point in time. The score reflects the ability and willingness of a consumer to repay back a loan on time. Credit reporting agencies maintain information on millions of consumers. Lenders make credit decisions by buying credit reports on prospective consumers from these agencies.

Each report details the credit history as it has been reported to the credit bureaus by the lenders who have extended credit to the consumer. The report usually lists the kind of credit that has been extended, the amount of time that the account has been maintained by the consumer and the payment history on that account.

A credit report does not actually exist until a lender or a consumer asks for it. It is then compiled by the credit bureaus based on the information that they have in their files. Each report consists of many aspects of the borrowing activities of the consumer. The information reported by each lender contains updates on how each consumer uses and pays for the account. All the pieces of information are collected and reported in relation to other data and this is what makes credit history useful to lenders.

How Credit History Works

Along with each credit report that lenders buy, they also get a credit score based on the information in the report. This score is a three digit number that is calculated by a mathematical equation that evaluates many types of information.

The exact formula for the calculation is protected by the Federal Trade Commission. By comparing this data to hundreds of thousands of past credit reports, the score can be useful in identifying a particular customer's risk level.

Determining Credit Scores

To determine the credit score, five main categories of information are used:

  1. Payment history is one of the most important factors in a credit score. It is one of the first things that most lenders want to know about their prospective customers credit history — whether he or she has paid their past credit accounts on time.

  2. The amount owed by the customer is another important bit of information for the lenders. Part of the credit scoring science is determining how much is too much when it comes to extending credit.

  3. The length of credit history is another determining factor. A good rule of thumb is, the longer the credit history, the higher the credit score and lower the credit risk of the consumer.

  4. How much new credit is the person willing to take? People today tend to have more credit and to shop for better credit. This reflects on the credit worthiness of a prospective client.
  5. Types of credit being used give a good idea of the persons credit mix.

Tips for Raising Credit Scores

Raising a credit score takes time and effort. A quick fix attempt at raising the score generally backfires. The best way to raise your credit score is to manage it responsible over time. Things like paying bills on time, keeping balances low on credit cards, paying off debt rather than moving it around, limiting the number or credit cards and new accounts, maintaining a healthy mix of credit all go a long way in making your credit history a good base for getting better credit over time.

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