How Does Credit History Work?

The Past

Credit histories are collected and cataloged by the major credit reporting bureaus: TransUnion, Experian and Equifax. The process behind collecting the data is relatively simple; lenders report to the credit bureaus, and the bureaus in turn keep track of all the information. Every consumer who has ever applied for credit or been granted credit by a reporting lender has a credit history. The history lists pertinent information that is designed to assist potential lenders in deciding whether or not to grant you credit based on how you have treated credit in the past. Items listed on the credit report pertaining to your past include previous addresses you've lived at, previous accounts you've held and a listing of the credit you have applied for even if it was denied. Creditors look very closely at your credit history to see if you have a good record of making payments on time and have not overextended yourself financially.

The Present

Although credit histories are not exactly accurate right up to the very minute, the payment history is usually accurate within one or two payment periods. This is because the creditors report periodically on accounts instead of immediately as they are updated. When lenders look at your credit history, they get a quick glimpse at how you are dealing with credit right now. Do you have open accounts? Are you overextended with your credit? Have you been applying for a lot of credit recently? Most importantly, are all your accounts up to date? Your credit history won't list accounts like utilities or child support payments unless they are delinquent or court-ordered, but lenders can get a reliable image of how you handle your credit card and loan payments by looking at your credit history.

The Future

Using all the information on your credit history, lenders can make a fairly accurate assumption as to your creditworthiness--in other words, how likely you are to pay on time if the lender grants you credit. If you have a strong history of making payments in a timely manner and you do not max out your credit lines on a constant basis, then chances are you will continue along the path of making wise credit choices. While some lenders will review an entire credit history, others are concerned only with the credit score attached to the report. The score does tell lenders a lot about your odds of paying them back, and the higher your credit score, the more likely you will be able to obtain credit approvals in the future.