The Importance of a Good Credit History

Most people’s first real experience with their credit report and credit score comes when they try to secure a loan for a car or a home mortgage, sometimes by this point it might be too late. Unknowing consumers have many opportunities to build and destroy their credit during the course of their everyday lives, and few ever truly understand the implications of their actions when it would have done the most good. All too often they let little things, things that do not seem bad or that seem almost irrelevant to their credit worthiness, ruin their chances for securing loans, gaining employment, or getting security clearances.

First, there is the differentiation between a person’s credit report and their credit score. A credit report is a detailed financial history of your life during the last ten years, including information such as how much debt you have incurred, balance and payment details, account information, whether you have had any delinquent payments, how often creditors have accessed your credit report, and if you have had any liens, bankruptcies, foreclosures, garnishments, suits, or judgments against you. Your credit score is a snapshot of your credit worthiness, defined as a weighted number representing how much of a financial risk you are. The Fair Isaac’s FICO score is the most common: the numbers range from 300 to 850, and the higher your number the less of a risk that you will be unable to repay any loans that are made to you. Your credit score is determined by weighing your payment history (35%), the amounts you owe (30%), the length of your credit history (15%), the number of new credit applications you’ve made (10%), and the types of credit that you use (10%). Most people fall somewhere between 650 and 799, with the median score being 723.

What all of this means is that seemingly insignificant actions, like carrying a credit card balance more than one or two months or getting hit with a late payment charge by one of your creditors, can drastically affect how other financial institutions judge your level of risk and whether it is in their interests to do business with you. This applies not just to credit cards, bank loans, and home mortgages, but cell phone companies, cable and Internet providers, and even prospective employers, especially those whose business is financial services. Even just applying for too many credit cards can negatively impact your credit score.

The three largest consumer credit reporting agencies – Equifax, Experian, and TransUnion – each maintain their own scores as they receive different information from creditors at different times, but they all cooperate in maintaining credit reports for consumers and businesses making credit inquiries. However, keep in mind that, the annual number of hits on your credit report is actually something that is considered in your credit report and used to calculate your credit score, so the fewer incidences in which your credit report must be checked, the better your credit score will be. This means that consumers are best off keeping loan inquiries, credit checks, and applications for things like credit cards to a minimum.

There are some factors relevant to your credit worthiness that do not fall into the categories that are used to determine your credit score, and it is sometimes the case that these factors, positive or negative, can overwhelm the effect of your credit score in a given scenario. These factors include things like a large number of high-value assets, a good and secure high-paying job, and other aspects of your financial situation that are not directly reflected in your credit. While these things may be of interest to lending institutions, they are not the factors that are considered the most important when determining financial risk. Other factors such as race, age, marital status, and religion represent legal protections against discrimination that cannot be used to calculate your credit score or in any way determine your credit worthiness, even though correlations have been observed between some of these factors and people’s credit scores.

The importance of a good credit history cannot be overstated: your credit report is checked every time you attempt to secure any kind of consumer credit, and your credit score can give you and financial institutions a basic understanding of whether you can be trusted financially or if you are simply too big of a risk. Without a good score it is nearly impossible to get auto or home loans, to secure employment in an industry that considers your credit history, or live the normal everyday life that other consumers live.