The Credit Report: What is Credit History?
A credit report is a document which records credit history for an individual or company. Essentially, it records all actions you take with regard to borrowing and repaying money. Details in the history include how much you owe, who you owe the money to, whether you make timely payments and whether actions were taken against you for non-payment. All information in a credit report is used by the reporting agency to calculate credit scores.
A Closer Look at Standard Credit Reports
Credit histories exist throughout most economically developed countries. In the United States, histories are reported by three main credit bureaus: Equifax, Transunion and Experion. Although the details for each bureau may differ slightly, the overall structure remains the same. You can expect your credit report will contain:
- Details on open credit accounts, including account age, current balance and whether you have made timely payments
- Similar details about closed accounts
- Negative credit items, such as foreclosure, repossessions, delinquencies, accounts being turned over to outside collection agencies and bankruptcy
- The number of times your report has been pulled within the past six months.
How Information Impacts Your Credit Score
Credit scores can fluctuate from bureau to bureau. However, the same overall logic is used in calculating a FICO score. The areas which most impact credit scores are payment history and debt amount. Payment history accounts for approximately 1/3 of a FICO score. Items which cause decreased scores include: late payments, charge offs, settlements, foreclosures, judgments and bankruptcies.
Accounting for almost another 1/3 of the impact on credit scores is the debt ratio. This includes both the debt-t- income ratio as well as the proportion of balance owed to available credit. If you make $1,000 per month and owe $800 per month, your score will be lower. Such a high debt to income ratio means you could have a hard time paying additional debts. Likewise, if you have a credit line of $2,000 and a balance of $1,800, you have almost maxed out your credit. This may also reduce your score.
The final third of a credit score is made up of several items. The length of time someone has had credit and age of each account are important. Stable payment history over a length of time increases FICO scores. The number of times a credit report is queried by lenders also impacts scoring. Although not all queries will reduce scores, numerous hits on the report in a short amount of time look bad for the borrower. It appears that he or she is attempting to get credit at many locations, possibly due to financial difficulty.
Creating and Maintaining a Credit History
The only way to get a credit history is to obtain credit. It is best to begin the process early. A small credit card or auto loan can be a great way to obtain credit. Although many credit card companies will set up small lines of credit for those without a history, lenders may be less inclined to do so for larger loans. A co-signer may be required for someone who has no previous credit. Once the loan is obtained, history begins.
It is important to maintain timely payments on all balances. For instalment loans, you should mail payments or pay online prior to the due date each month. For revolving credit, you should attempt to maintain an average balance less than 30% of the total available credit at all times. Optimally, you would not want to carry a balance at all. You should also pay more than the minimum due each month. Checking your credit report yearly ensures there are no incorrect items and also helps you gain knowledge about your credit history.
If you have a low credit score and want to begin the process of repairing your credit, you should order your credit score. Take care of any delinquent accounts and have incorrect information removed. Then, begin attacking each problem one-by-one. Pay down large revolving credit balances and ensure you make timely payments going forward. Your score will slowly increase as you take good care of your credit.