Lesson 6 - Credit
What is Credit History
Credit history is a record of a consumer's ability to repay debts and demonstrated responsibility in repaying debts. A consumer's credit history includes the following:
- Number and types of credit accounts
- How long each account has been open
- Amounts owed
- Amount of available credit used
- Whether bills are paid on time
- Number of recent credit inquiries
It also contains information regarding whether the consumer has any bankruptcies, liens, judgments or collections. This information is all contained on a consumer's credit report.
BREAKING DOWN Credit History
Potential creditors, such as mortgage lenders and credit card companies, use the information in a consumer's credit history to decide whether to extend credit to that consumer. This information is also used to calculate the consumer's FICOscore.
Why the Length of Credit History Matters
When creditors review an applicant’s credit history in order to determine whether or not to provide financing to them, recent activity is not the only factor being assessed. The length of time that credit accounts have been open and active will also be taken into consideration. Furthermore, the patterns and regularity of repayment over longer periods of time will weigh more favorably in the assessment. It has sometimes been suggested that a borrower continue make installment payments rather than outright pay off outstanding debt in order to continue to build up a positive credit history. This would include paying off interest, not just the minimum amount, in order to continuously reduce the debt over time.
Potential borrowers who have no credit history, for example college-age young adults, may have difficulty being approved for substantial financing or leases. Landlords might decide to not rent out an apartment to an applicant who has no credit history that demonstrates their ability to make payments on time.
For those without any credit history, one can be established by taking out a small personal loan or applying for a credit card with a small available balance. Such usage lets the borrower demonstrate how well they can manage their credit on a limited scale before taking on larger amounts of debt.
It is possible for a borrower to see their credit history wiped clean if they have paid off all their debts and do not take out a loan, credit card, or other form of financing for a number of years. This interval can be seven or 10 years. Even borrowers who had an extensive prior creditor history could effectively start over if such long gaps occur.