Did your bank reject your loan approval due to a bad credit history, and all you are wondering is what is the role of credit history in all this. If so, then in this article, we will explain the importance of credit history and good credit score.Â
A good credit history is an important factor when you seek a loan, credit card, car rental, and other services. You need to take your credit report seriously. Debt repayment on time is a crucial factor for credit history. Lenders use credit history while approving any loan request, credit card request or other financial services you seek.Â
What is Credit History?
Credit history is a record of all transactions like borrowing, repayment, purchasing, and other activities of an individual till the current time. This record is used to determine the creditworthiness of a person i,e. Whether or not he can repay borrowed money.
Credit history generally depends on how you made your debt repayment, i,e timely or late. Your credit history is recorded as a credit report. For instance, if you want a home loan your credit history would be analysed along with other metrics.Â
If your credit score is in the range of 670-740 then your loan might be approved. You might check your credit history periodically over time. Many websites can tell your credit history when you submit important details like your name, dob, PAN number, etc.Â
Credit History Key Takeaways
- Credit history is a record of all transactions carried out by a person till the current date. The debt repayment pattern is taken into consideration.
- A good credit score lies in the range 679-740. Your credit report must have a number greater than 600.
- If you want to approve loans and other financial services, your credit history is important.
- Credit history takes into account the age of the account, timely repayments, credit utilization ratio, credit inquiries and more.Â
- A longer credit history has a positive impact on your credit score.Â
Also, check, What is Credit Risk and its importance?Â
Why is Credit History Important?
Credit history is important as it highlights how you have managed your finances in the past. Credit history is important in a number of ways, check them below.
- Credit history is an important factor when you seek approval for loan, credit card, rentals, EMI, etc.Â
- A good credit history can help you get loans at a good interest rate.
- Your credit history might be used by insurance companies when deciding your insurance rates
- Landlords might review your credit history when you apply for room rentals or commercial leases.
- Sometimes your credit history is evaluated by your employers before making a final hiring decision.
- Service based organisations might assess your credit history to decide whether or not a security deposit is required.
Credit history marks your credit worthiness and your eligibility to avail financial services. Hence, it becomes very important to manage your credit history.
Also, Check, Top Asset Management Companies in IndiaÂ
What factors affect your Credit History?
A credit history depends on a number of factors that must be taken into consideration.Â
Payment History
It is the most important factor which affects the credit history. On time payments are a good indicator which tells that you are consistent on your debt repayment. Avoid late payments practise as it severely affects your credit score.
Credit Utilization Ratio
Credit utilisation is the percentage of available credit that you are currently using. The formula for credit history utilisation ratio is obtained by dividing the total credit card balances by credit card limits. AÂ credit utilisation ratio below 30% is considered better.Â
Length of Credit History
The age of your accounts also adds up in evaluating your credit report. Old accounts are taken positively. If all your account average age is high then it is good for your credit history. Avoid opening several accounts in a short period of time as it might severely affect your credit score.
Public RecordsÂ
Any history of bankruptcies, foreclosures, tax liens, collection accounts, or unpaid debts can stay in your credit history for long, often 7 to 10 years, and if not settled properly can severely impact your credit history.Â
Frequent Inquiries
Multiple inquiries of credit reports over a short period of time can lower your credit score temporarily. There are two types of inquiries taken into consideration that impact your credit history.
- Hard Inquiries: When your lender checks your credit history frequently for credit card approval, mortgage, auto loan, etc. These activities are kept under hard inquiries and impact credit scores.
- Soft Inquiries: These inquiries have a little or no impact on credit history such as pre-approved credit, personal credit review, etc.
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What are Good Credit Building Practices?
Maintaining your credit history is important to access all financial services easily without any barriers. Let us know what practices might help you maintain a good credit score.Â
- Always make timely payments and never delay your loan repayment. You might set up automatic payments or remainders to make repayments on time.
- Maintain a low credit utilization ratio. A credit utilization ratio below 30% is considered better.Â
- Keep your old accounts running and avoid closing accounts as they might be profitable in the long run.
- Keep your hard credit inquiries in check. Frequent hard credit inquiries in a short period of time might pose a higher risk to lenders.
- Make sure your credit reports are free from error and keep yourself informed.Â
- Educate yourself on credit to make informed decisions. You might try to learn from online resources, attend workshops or consult financial advisors.Â
- Students might take small student loans to start building a good credit history.
If your credit score is below the 600 mark then it is important for you to follow all these practices given above. You might try consulting a financial advisor for the steps you might take to improve your credit score.Â
Good Credit Practices Vs Bad Credit PracticesÂ
Check some of the good and bad credit practices to build a stable and reliable credit history.
| Good Practices | Bad Practices |
| Making timely payments | Missing scheduled payments |
| Keeping balance low | Maxing out balances |
| Maintaining old accounts | Closing old accounts and building frequent new accounts |
| Diversifying credit types | Single credit type |
| Limiting credit applications | Allow Multiple applications |
| Keeping credit reports in check | Ignoring credit reports |
| Using secured credit cards | Taking excessive debts |
| Setting up payment reminders | No tracking of due dates |
| Responsible credit uses | Credit abuse |
What is No Credit History?
No credit history signifies that your expenses are not taken into account. This might arise due to some following reasons.
- You never took loan or credit services
- Recently opened credit account
- You make payments with cashÂ
Having no credit history accounts might highlight that you are inexperienced or new to availing financial services. This might pose a higher risk of disapproval of financial services you seek such as loan, credit card services, etc.Â
If you are new you might start by opening a bank account, take loans and repay on time. Keep your credit utlisation in check and start building a good informed credit history.Â
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Credit History FAQs
Q1. What is Credit History?
Ans: Credit History is a detailed report or statement of your credit activities like borrowing, debt repayment, late payments, defaults and outstanding debts.
Q2. How important is credit history?
Ans: Credit history is important for lenders to assess how risky is providing loans, credit cards and other services to an individual. Your credit history is an important factor for your loan or approval of other financial services.
Q3. Is it important to maintain credit history for a positive credit score?
Ans: Building a positive credit history is an important factor to maintain your credit score. Good Credit practices over a period of time build your credit score.
Q4. Does credit history signify stability?
Ans: Credit history is an important indicator for stability and reliability. It is an important factor which shows how well a borrower managed their credit expenses over a long period of time.
