Credit history


A credit history is a record of a borrower's responsible repayment of debts.
A credit report is a record of the borrower's credit history from a number of sources, including banks, credit card companies, collection agencies, and governments. A borrower's credit score is the result of a mathematical algorithm applied to a credit report and other sources of information to predict future delinquency.
In many countries, when a customer submits an application for credit from a bank, credit card company, or a store, their information is forwarded to a credit bureau. The credit bureau matches the name, address and other identifying information on the credit applicant with information retained by the bureau in its files. The gathered records are then used by lenders to determine an individual's credit worthiness; that is, determining an individual's ability and track record of repaying a debt. The willingness to repay a debt is indicated by how timely past payments have been made to other lenders. Lenders like to see consumer debt obligations paid regularly and on time, and therefore focus particularly on missed payments and may not, for example, consider an overpayment as an offset for a missed payment.

Credit history usage

There has been much discussion over the accuracy of the data in consumer reports. In general, industry participants maintain that the data in credit reports is very accurate. The credit bureaus point to their own study of 52 million credit reports to highlight that the data in reports is very accurate. The Consumer Data Industry Association testified before the United States Congress that less than two percent of those reports that resulted in a consumer dispute had data deleted because it was in error. Nonetheless, there is widespread concern that information in credit reports is prone to error. Thus Congress has enacted a series of laws aimed to resolve both the errors and the perception of errors.
If a US consumer disputes some information in a credit report, the credit bureau has 30 days to verify the data. Over 70 percent of these consumer disputes are resolved within 14 days and then the consumer is notified of the resolution. The Federal Trade Commission states that one large credit bureau notes 95 percent of those who dispute an item seem satisfied with the outcome.
The other factor in determining whether a lender will provide a consumer credit or a loan is dependent on income. The higher the income, all other things being equal, the more credit the consumer can access. However, lenders make credit granting decisions based on both ability to repay a debt and willingness as indicated by a history of regular, unmissed payments.
These factors help lenders determine whether to extend credit, and on what terms. With the adoption of risk-based pricing on almost all lending in the financial services industry, this report has become even more important since it is usually the sole element used to choose the annual percentage rate, grace period and other contractual obligations of the credit card or loan.

Calculating a credit score

Credit scores vary from one scoring model to another, but in general the FICO scoring system is the standard in U.S., Canada and other global areas. The factors are similar and may include:
  • Payment history : A record of negative information can lower a consumer's credit rating or score. In general, risk scoring systems look for any of the following: bankruptcies, collections, charge offs, late/missed payments, repossessions, foreclosures, settlements, liens, and judgements. Within this category, FICO considers the severity of the negative item, the age of the negative items and the prevalence of negative items. More recent unpaid or delinquent debt is considered worse than older unpaid or delinquent debts.
  • Debt : This category considers the amount and type of debt carried by a consumer as reflected on their credit reports. The amount of debt you have divided by your total credit limit is called the credit utilization ratio. There are three types of debt considered in this calculation.
  • * Revolving debt: This is credit card debt, retail card debt and some petroleum cards. And while home equity lines of credit have revolving terms the bulk of debt considered is true unsecured revolving debt incurred on plastic. The most important measurement from this category is called "Revolving Utilization", which is the relationship between the consumer's aggregate credit card balances and the available credit card limits, also called "open to buy". This is expressed as a percentage and is calculated by dividing the aggregate credit card balances by the aggregate credit limits and multiplying the result by 100, thus yielding the utilization percentage. The higher that percentage, the lower the cardholder's score will likely be. This is why closing credit cards is generally not a good idea for someone trying to improve their credit scores. Closing one or more credit card accounts will reduce their total available credit limits and likely increase the utilization percentage unless the cardholder reduces their balances at the same pace.
  • * Installment debt: This is debt where there is a fixed payment for a fixed period of time. An auto loan is a good example as the cardholder is generally making the same payment for 36, 48, or 60 months. While installment debt is considered in risk scoring systems, it is a distant second in its importance behind the revolving credit card debt. Installment debt is generally secured by an asset like a car, home, or boat. As such, consumers will use extraordinary efforts to make their payments so their asset is not repossessed by the lender for non-payment.
  • * Open debt: This is the least common type of debt. This is debt that must be paid in full each month. An example is any one of the variety of charge cards that are "pay in full" products. The American Express Green card is a common example. Open debt is treated like revolving credit card debt in older versions of the FICO scoring system but is excluded from the revolving utilization calculation in newer versions.
  • Time in file : The older the cardholder's credit report, the more stable it is, in general. As such, their score should benefit from an old credit report. This "age" is determined two ways; the age of the cardholder's credit file and the average age of the accounts on their credit file. The age of their credit file is determined by the oldest account's "date opened", which sets the age of the credit file. The average age is set by averaging the age of every account on the credit report, whether open or closed.
  • Account Diversity : A cardholder's credit score will benefit by having a diverse set of account types on their credit file. Having experience across multiple account types is generally a good thing for their scores because they are proving the ability to manage different account types.
  • The Search for a New Credit : An inquiry is noted every time a company requests some information from a consumer's credit file. There are several kinds of inquiries that may or may not affect one's credit score. Inquiries that have no effect on the creditworthiness of a consumer, which remain on a consumer's credit reports for 6 months and are never visible to lenders or credit scoring models, are:
  • * Prescreening inquiries where a credit bureau may sell a person's contact information to an institution that issues credit cards, loans and insurance based on certain criteria that the lender has established.
  • * A creditor also checks its customers' credit files periodically. This is referred to as Account Management, Account Maintenance or Account Review.
  • * A credit counseling agency, with the client's permission, can obtain a client's credit report with no adverse action.
  • * A consumer can check his or her own credit report without impacting creditworthiness. This is referred to as a "consumer disclosure" inquiry.
  • * Employment screening inquiries
  • * Insurance related inquiries
  • * Utility related inquiries
  • Inquiries that can have an effect on the creditworthiness of a consumer, and are visible to lenders and credit scoring models, are made by lenders when consumers are seeking credit or a loan, in connection with permissible purpose. Lenders, when granted a permissible purpose, as defined by the Fair Credit Reporting Act, can "pull" a consumer file for the purposes of extending credit to a consumer. Hard inquiries can, but do not always, affect the borrower's credit score. Keeping credit inquiries to a minimum can help a person's credit rating. A lender may perceive many inquiries over a short period of time on a person's report as a signal that the person is in financial difficulty, and may consider that person a poor credit risk.

    Acquiring and understanding credit reports and scores

Consumers can typically check their credit history by requesting credit reports from credit agencies and demanding correction of information if necessary.
In the United States, the Fair Credit Reporting Act governs businesses that compile credit reports. These businesses range from the big three credit reporting agencies, Experian, Equifax, TransUnion, to specialty credit reporting agencies that cater to specific clients including payday lenders, utility companies, casinos, landlords, medical service providers, and employers. One Fair Credit Reporting Act requirement is that the consumer credit reporting agencies it governs provide a free copy of the credit reports for any consumer who requests it, once per year.
The government of Canada offers a free publication called . This publication provides sample credit report and credit score documents with explanations of the notations and codes that are used. It also contains general information on how to build or improve credit history, and how to check for signs that identity theft has occurred. The publication is available online through , the site of the Financial Consumer Agency of Canada. Paper copies can also be ordered at no charge for residents of Canada.
In some countries, in addition to privately owned credit bureaus, credit records are also maintained by the central bank. Particularly, in Spain, the Central Credit Register is kept by the Bank of Spain. In this country, individuals can obtain their credit reports free of charge by requesting them or by mail.