What is a credit history?

Whenever you need credit, a credit provider has to decide whether you are a worthy candidate for extending credit. Your credit history is a piece of critical information that helps potential lenders make that decision. Having a good credit history can make it easier for you to borrow on favourable terms and also improve your credit score.

Here is what you need to know:

Credit history is a record of your debt management and repayments. It consists of information such as:

• The number and type of accounts/credit products you have, whether active or closed
• Outstanding amounts of each account; and
• Repayment history of each credit product which includes repayment amount, payment due date, whether you make repayments on time, and whether there were any delayed or missed payments

Let’s illustrate the credit history definition with an example. Suppose A has two credit cards and one instalment loan currently. A year back, he cancelled a credit card and repaid his home mortgage loan. Detailed particulars of each credit product, including what is the credit limit on each card, how much is currently outstanding, how long has he been using these cards, and what is his repayment track record of credit card dues and loan EMIs -- all forms part of A’s credit history.

Credit report is a detailed document that records your credit history. Apart from your previous credit history, the report also contains:

• Personal identification information such as your name, current, and previous residential addresses, employer details
• Public records such as any judgments against you, serious credit infringements, bankruptcies filed by you, and tax claims on your assets
• Details of credit providers who have made a credit inquiry in the past to access your credit information

Credit reporting agencies are responsible for generating credit reports of a borrower and they do it based on the data collected from their creditors.

Every lender wants to extend debt to a responsible borrower who will repay on time. To evaluate a borrower’s creditworthiness, lenders need evidence that shows that the borrower has successfully repaid debts in the past. Reviewing your credit history helps a lender assess your track record of payments and determine whether you are the right candidate for a new credit product.

Credit rating agencies also use your credit history information and apply a scoring model to determine your credit score.

A credit score is a three-digit number, typically between 300 and 850, that indicates your creditworthiness. Credit providers use credit scores to determine your eligibility to borrow and decide the terms of the borrowing. The healthier your credit history, the better is your credit score. And the better your credit score, the lower is your risk of default, making you an attractive candidate for borrowing.

A good credit history indicates that you don’t default on debt repayments or have a massive amount of outstanding debt. Having a good credit history can help you achieve a good credit score and also make it easier to get approved for loans and credit cards at favourable terms.

Here’s what you can do to make sure you maintain a good credit history consistently:

• Pay your credit card/loan instalments in full and on time so that they don’t get flagged as collection accounts
• Ensure that your total credit utilisation ratio stays below 30%. Anything higher than that impacts your credit score and positions you as an overextended borrower who is likely to find it difficult to repay debt
• Regularly review your credit report for a credit history check. Incorrect information about your credit history can adversely impact your credit score.

Bad credit history depicts negative credit behaviour in the recent past. It shows that you have not been responsible about debt repayments and have accumulated too much debt within a short time. Maxing out your credit cards, filing for bankruptcy, or foreclosure actions by a lender due to mortgage default can also contribute to bad credit history.

You may find it challenging to get approved for loans or credit cards as an immediate consequence of bad credit history. Even if a credit provider agrees to lend, they may charge a high-interest rate, offer you a much smaller amount than what you need, or set a very low credit limit on your credit card. Together, these can increase the effective cost of borrowing.

Fortunately, bad credit history is not irreversible. Here’s what you can do to improve it:

• repay all bills on time
• not apply for too many credit cards. Each time you make an application, the credit provider runs a credit check. It is considered a hard inquiry, and such credit checks affect your credit score negatively.
• if you need to apply for a new credit product, try to get a co-signer who has a good credit history
• consider debt consolidation in case of multiple outstanding debts

When you apply for a credit product, every lender performs credit score checks as part of the approval process. If you are a young adult or you have never had a credit card or borrowed any loan, you may have no credit history. A lack of credit history means your credit score is likely to be zero, leading to your rejection.

It is possible to build credit from the ground up even with zero credit history. Here’s how:

Become an authorised user on an existing credit card

If your parent, spouse, sibling, or friend has a functional credit card and a good credit history, consider becoming an authorised user on their card. This can help you benefit from their existing credit history and build your own. Card companies impose no liability on authorised users for repayments. That’s why this is a low-risk method of building credit.

However, be careful who you pick -- they should have a solid history. You don’t want to tag along with someone who has a history of delayed payments, as that will impact the credit history you are trying to build. At the same time, you should also be a responsible user and chalk out a clear debt repayment plan so that you don’t bring down someone else’s credit score.

Apply for a secured credit card

If you have a checking account, you may be eligible for a secured credit card. Such a card requires the cardholder to deposit an amount of money that serves as the credit limit.

Do not spend beyond the limit and repay the bills on time to build your credit history. You can apply for ordinary credit cards once you have a sufficient track record.

Use credit-building tools to pay monthly utility bills

Financial institutions have credit-building tools that you can use for paying your monthly utility bills. You’ll need to connect the bank account you use to make payments to the tool and confirm that you want payment information reflected on your credit file.

Every timely payment can help you boost your credit history.

Apply for a credit builder loan

Credit builder loans are specialised loans meant to help individuals end their credit invisibility. The loan amount is usually between $300 to $1,000, but you don’t get immediate access to the funds. Instead, the lender deposits it into an account. You can use it only after you have repaid the loan in full.

The interest rate for such a loan is usually low. It takes anywhere between six to 24 months to repay it and improve your credit.

The best way to check credit history in Australia is by reviewing your credit report. Usually, credit reporting bodies provide a free copy of your credit report at least once a year. You can also get your credit reports directly from a credit report provider like ClearScore.

Given that different credit providers report to different credit rating agencies, there is a chance that your credit history may vary slightly.

Reviewing your credit history is necessary to understand your current financial status and to analyse your current credit score. It can also help you look out for any discrepancies and dispute errors in your credit report.

Wondering how to get your credit history and a free credit score check anytime you want? Sign up with ClearScore to check your credit report and credit score for free, whenever you need to.