Credit history

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This article deals with the general concept of the term credit history, for detailed information about the same topic in the United States see Credit score (United States).

Credit history or credit report is, in many countries, a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy. The term "credit reputation" can either be used synonymous to credit history or to credit score.

When a customer fills out an application for credit from a bank, store or credit card company, his or her information is forwarded to a credit bureau, along with constant updates on the status of his or her credit accounts, address or any other changes you may have made since the last time he or she applied for any credit.

This information is used by lenders such as credit card companies to determine an individual's or entity's credit worthiness; that is, determining an individual's or entity's means and willingness to repay an indebtedness. This helps 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 (APR).

1 How credit rating is determined
2 Understanding credit reports and scores
3 International issues
4 Bibliography
5 References
6 See also
7 External Links

[edit] How credit rating is determined

Credit ratings are determined differently in each country, but the factors are similar, and may include:

Payment record: A record of bills being overdue will lower the credit rating.
Control of debt: Lenders want to see that borrowers are not living beyond their means. Experts estimate that non-mortgage credit payments each month should not exceed more than 15 percent of the borrower's after tax income.
Signs of responsibility and stability - Lenders perceive things such as longevity in the borrower's home and job (at least two years) as signs of stability.
Re-Aging - Through re-aging, a credit history is re-written and you are given a fresh start on that particular account. This can dramatically improve the credit score. In 2000 the Federal Financial Institutions Examination Council (FFIEC) clarified guidelines on re-aging accounts for delinquent borrowers. [1] (PDF)
Credit cards that are not used - Although it is believed that having too many credit cards can have an adverse effect on a credit score, closing these lines of credit will not improve your score. The credit rating formula looks at the difference between the amount of credit a person has and the amount being used, so closing one or more accounts will reduce your total available credit. This in turn lowers the percentage of available credit, and the credit score will drop. The credit formula also factors in the length of time credit accounts have been open, so closing an account with several years of history is another avoidable credit mistake.
Credit inquiries - An inquiry is a notation on a credit history file. There are two kinds of notations:
1. "Soft" Credit Pulls:
  1. A credit bureau may sell a person's contact information to an advertiser purchasing a list of people with similar characteristics, like homeowners with excellent credit.
  2. A creditor can check a person's credit periodically.
  3. A credit counseling agency, with the client's permission, can obtain a client's credit report with no adverse action.
2. "Hard" Credit Pulls: Hard credit inquiries are made by lenders. Lenders, when granted a permissible purpose by a borrower for the purposes of extending his credit, can check his credit history. Hard inquiries from lenders directly 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 on a person's report as a signal that the person is looking for loans and will possibly consider that person a poor credit risk.

[edit] Understanding credit reports and scores

In the United States, once every 12 months, each person is entitled to one free credit report from each of the three nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.

The Government of Canada offers a free publication called Understanding Your Credit Report and Credit Score. 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 at http://www.fcac.gc.ca, the site of the Financial Consumer Agency of Canada. Paper copies can also be ordered at no charge for residents of Canada.

[edit] International issues

Credit history is typically local to one country. Even within the same credit card network information is not shared for different countries. For example, a person who has been using Visa credit cards issued by banks in China or Canada for many years who moves to the United States and immediately applies for a Visa will not be approved because of lack of credit history. However, bringing in evidences of good credit history from the previous country of residence will greatly help. Examples of such evidences are utility bills or credit card statements for the past couple of years.

[edit] Bibliography

On the history and origins of credit reporting, see Born Losers: A History of Failure in America, by Scott A. Sandage (Harvard University Press, 2005), chapters 4-6.