Credit history (also called credit report) is a very important aspect of life. Some people do not understand the importance of credit history until they are denied credit. Situations like this do not happen when consumers have a full understanding of their credit and credit history. Every aspect of credit plays an important role in whether or not creditors lend credit to customers.
Credit History Definition & Overview
Consumers’ credit history is kept in a document known as the credit report. Credit history is an in depth account of how well lenders manage their credit. When creditors extend credit to their consumers, they keep a record of the payment history and report is to one of the 3 credit agencies. Late payments and missed payments are reported to the credit agencies who in turn record the information on the credit report. The report of customers’ credit history is available to them to see as well as potential lenders who may be considering lending credit to customers. Credit history makes up the largest percentage of a credit scores. Consumers should know that credit history accounts for 35% of a credit score.
Consumers should know that their credit history consists of past and present accounts. Do not think for one second that paying off bills automatically increases the credit score. Credit history consists of open and closed accounts on mortgages, credit cards, and loans. Credit history can remain on the credit report for many years after the late or missed payments. Bankruptcies and defaulted loans also play a part in credit history.
Something else can lead to lower credit scores that can affect credit history: high credit balances. Just because payments are always on time does not mean that credit history remains intact. When cardholders have less than 50% of available credit on their credit cards, their credit score lowers. For example, a credit card with a $1,000 credit limit with only $300 of available credit can hurt credit history.
The History of Credit Reports/Credit
The practice of offering consumer credit began during the 18th century. Western Union started the first official credit system of the modern age in 1914. Many other large companies followed in Western Union’s path. World War II created the need for an established credit system. Businesses began to grown after World War II so there was a great need for more credit in the economy. The establishment of the credit system began to strengthen.
Consumer credit use created the need for a universal system that allowed lenders to share credit information about their customers in order to make good credit decisions. The first credit agencies consisted of non-profit groups owned by participating merchants. By the 1970s, there were over 2,000 credit reporting agencies around the country. During that same time, large companies that offered credit created their own systems to maintain credit records, which limited credit decision agencies around the country. The record keeping became very time consuming so these large companies moved to consolidating these agencies on a national and regional basis. By 1998, there were more than 500 credit bureaus in the United States. The three main credit scores that emerged were Trans Union, Equifax, and Experian.
Why Credit History Matters
- Credit history determines whether lenders extend credit. It is important that consumers understand that credit history accounts for the largest portion of a credit score. The first thing that potential lenders look at is the payment history on the credit report. Late payments, defaults, and bankruptcy send up red flags for potential lenders.
- Credit history may affect interest rates. Lenders offer their best interest rates on mortgages, car loans, and credit cards to those with the best credit ratings. Those with credit histories that reflect high credit limits and late payments may still qualify for credit, but they may receive the highest interest rates on the market.
- Good credit history is necessary for customers who want to purchase homes. Many people dream of owning their own home. That dream may never come for those with a poor credit history. High interest rates can make a significant difference on large investments such as homes. Good credit history can save consumers thousands of dollars in interest along with the monthly payments.
Credit history is important to consumers who want to receive credit. Mistakes on credit reports that can affect credit history are very common. It is very important that consumers receive a credit report from each of the three credit agencies each year to assure that their credit history is correct. Once consumers ruin their credit history, it is extremely hard to get back on track. Always use credit wisely.