A credit history, as the name implies, is a record of a person's credit use. Lenders find it useful because it gives them an idea of how a consumer is likely to handle financial obligations in the future. Someone who always pays bills on time will probably continue to do so, while a spotty payer with many accounts and high balances has a higher chance of defaulting on loans and credit cards.
Definition
Credit reports contain consumers' credit histories. Equifax, Experian and TransUnion are three independent credit reporting agencies that compile and sell financial information on individuals. Buyers include banks and other lenders, insurance companies, human resources departments and others processing credit, insurance or employment applications, according to the Federal Trade Commission.
Factors
Many factors affect a person's credit history, such as the number and age of accounts, balances, credit limits and payment performance, according to FICO, the largest credit score provider. The history also lists creditor inquiries that happen when a consumer applies for new accounts. The reporting agencies include demographic information, such as employers and current and former residence addresses, which indicate a person's stability. For example, spotty employment or many moves within a short period might indicate problems, while a long-term residence and employer is a positive indicator.
Time Frame
A credit history goes back varying amounts of time, depending on the specific items. Positive entries can appear indefinitely, while the FTC states that most bad items must be deleted in seven years. Bankruptcy is an exception, remaining for 10 years. Items are no longer considered by FICO or lenders when they drop out of TransUnion, Experian and Equifax files after the allowed reporting period. Older items do not have as much influence as recent activity.
Considerations
Young adults must develop credit histories before they can qualify for major loans such as car loans and mortgages. MSN Money writer Liz Pulliam Weston explains that some save up money to get secured credit cards, which require a collateral deposit to guarantee the account. Gasoline companies and retail stores will sometimes extend credit to consumers without an established history.
Warning
Credit history is sometimes reported incorrectly by the agencies. Motley Fool financial site columnist Dayana Yochim warns that 80 percent of files have some erroneous negative data. Consumers can check their reports and dispute the mistakes, according to the FTC. The government provides a site, annualcreditreport.com, where consumers can order one free report each year for review from each of the three major credit bureaus. The reporting agencies all have online forms for challenges and are required by law to investigate within 30 days and purge or fix mistakes.
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