What is meant by credit history?
It is a comprehensive look at your past performance and includes your repayment history on both open and closed accounts. Creditors, collection agencies, and government agencies provide information to be scored and reported via a credit report.
What is a credit report?
It shows how much you owe creditors, how long each account has been open, and how consistently you pay your bills on time. A credit report will also return collections records and bankruptcy filings.
Under the Fair Credit Reporting Act, consumers are entitled to one free credit report annually from each of the three major credit reporting agencies (CRAs). Viewing your credit reports will allow you to review what lenders will see when you apply for a loan. The major difference between what they will see and what you can see is that AnnualCreditReport.com will not provide you a credit score. Instead it will provide you a list of accounts and payment status on each. Still, being able to identify any blemishes on your report allows you to address, and hopefully fix them, which will directly impact your credit score.
What is a credit score?
Scores range from 300 to 850, ranking from poor to excellent, respectively. The rating criteria for credit scores is roughly the same across all credit reporting agencies (CRAs), though they differ on exactly how to weight any one criteria. CapCenter does not prefer one CRA over the other and instead pulls three scores—one from each major CRA—and bases its loan decisions on the median.
CRAs handle the calculation and disclosure of credit scores.
How is a credit score calculated?
Today there are three major credit reporting agencies (CRAs): TransUnion, Experian and Equifax. Each CRA uses its own unique model but, generally, there are five criteria that make up your credit score: your payment history, used vs. available credit, length of credit history, types of credit used, and new credit.
- On-time payments
- Account in collection
It is ideal to make all payments on time. If you are a few days past due, it is not guaranteed that the lender will report the late payment. If you are over 30 days late on a payment, however, you can assume the lender reported a delinquent payment. In cases of extreme or continuous delinquency, some lenders will send or sell account balances to collection agencies.
Note: The Fair Credit Reporting Act set a 7-year limit for most negative marks, so any late payment or collection should fall off after that time. If there is something showing on your report that is older than 7 years, you have the option to dispute it with the credit agency.
- Amount of total revolving credit that has been used
- Installment loan balances vs. original loan amount
- Number of zero balance accounts
The primary consideration in this category is not just how much you owe, but instead your overall credit utilization ratio. Credit bureaus determine credit utilization ratio by comparing current balances with credit limits. Experian suggest keeping utilization under 30%.
If you are curious, you can do your own calculation by adding up the balances on all of your credit card accounts and dividing that number by the sum off all your credit limits. You then multiply that number by 100 to get your total percentage.
Length of credit history
- Total length of time on your credit report
- Amount of time since opening of accounts
- Date of last activity on accounts
Impacting this number can take some time, as there is no good and reliable shortcut to a lengthy personal credit history. Something that may help is becoming an authorized user on an account that the primary user has had for a long time. Accounts do not have to be active to count toward your length of credit history. Closing a credit card in good standing can remain as a positive mark for up to 10 years.
- Total number of installments, revolving, mortgage or other types of account
Some credit scores are built for specific types of credit. The score pulled by a mortgage loan officer, for instance, will likely return a slightly different number than one pulled by an
auto-lender. Showing the ability to pay on a mix of accounts helps your overall credit score. Showing an ability to pay on specific accounts can be particularly helpful when applying for specific financing.
- Number of accounts recently open
- Proportion of new accounts to total accounts
- Number of recent credit inquiries
- Length of time past for recent inquiries or new accounts
Recent activity is not inherently bad. A new account may lower the average age of your accounts but may diversify your credit history and always presents the opportunity to make more on-time payments. The main consideration is the amount of recent ‘hard inquiries.’ A hard inquiry means you are applying for credit. Doing so too much or too often is considered risky behavior by credit bureaus. If you are shopping loans for the best interest rates, however, this is not risky behavior. So, there is an allotted 30-day “shopping window” in which any extra mortgage-related credit inquiries will not count against your score.