Some people have a misconception as to what credit history is and how it works. For instance, many people think that this piece of data comes from loan applications, bankruptcies, repayment defaults, etc. They are not wrong, but there is more to a credit history than just a series of unfortunate financial decisions. Some people even use the term credit history and credit score interchangeably, and this notion is wrong.
Credit History Vs. Credit Score
Let us clear something up first. The term Credit history is not synonymous with the term credit score.
Credit history contains all information involving credit accounts, balances due and details of payment history. Your credit history will also include information about overdue debts, bankruptcies, and court judgements. All this data is accessible through your credit report. Keep in mind that whenever you apply for a short term loan or any form of a loan, you are authorising your lender to gain access to your credit report.
Now, all that is clear– your credit score is something different. It is a numerical calculation obtained by analysing the information in your credit report. Your score helps lenders determine how credit-worthy you are and how reliable you are as a borrower. This numerical calculation of your credit report can go up and down depending on how good your payment history and account balances look, among other things.
Credit History Includes Positive Information
Although credit history has a reputation of containing an individual’s financial mishaps, there is more than just that in a credit report. For instance– your credit history contains information for your electricity, home internet, and smartphone plan to get approved. Service providers need to see your credit history before they approve your application for their services.
Make sure that you make payments on time as all this data goes into the calculation that makes up your credit score. The better your credit history the higher your credit score. You may not feel like you need any financial services like a short term loan right now, but you never know when the need is going to hit you.
Things Excluded from Your Credit History
Now that it’s clear what goes into your credit history, what doesn’t go into your credit report?
For starters, credit history does not take your assets, wealth and income into consideration. Why? Because you can be wealthy with a lot of income and still have a terrible bill payment history. Inversely, you can have low income and still have an immaculate bill payment history.
It all comes down to your sense of financial responsibility and how you manage your finances.
Your credit history says a lot about how you handle your finances, and it affects your credit score. It only makes sense that you do everything you can to maintain a clean history and a high score.
Since you are now one or two terms smarter regarding this whole financial business, you’ve already made one step forward. The next step is to check your credit history and score so that you can evaluate if there is anything that you need to change or improve. Remember, it is all about how you manage your finances.
The opinions expressed in the Blog are for general informational and entertainment purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.