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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, their information is forwarded to a credit bureau, along with constant updates on the status of their credit accounts, address or any other changes you may have made since the last time they 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 APR (annual percentage rate).
How credit rating is determined
A credit rating will be determined differently between different countries, but the general concepts are similar, and may include:
- Payment record - a record of bills being paid over due will negatively affect the credit rating.
- Control of debt - Lenders want to see that clients are not living beyond their means. Experts estimate that non-mortgage credit payments each month should not exceed more than 15 percent of your after tax income.
- Signs of responsibility and stability - Lenders perceive things such as longevity in clients home and job (at least two years) as signs of stability. Having a respected profession can improve a credit rating.
- 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 (FFEIC) clarified guidelines on re-aging accounts for delinquent borrowers. * (PDF)
- Credit inquiries – An inquiry is a notation on a credit history file. There are several kinds of notations that may or may not have an adverse effect on the credit score. Soft pulls don't affect the credit score and are characteristic of the following examples:
A credit bureau may sell your contact information to an advertiser purchasing a list of people with similar characteristics, like homeowners with excellent credit. A creditor can check your credit periodically and so note your file will no adverse effect to your credit history. Or, a credit counseling agency, with your permission, can pull your credit report with no adverse action. Each of the preceding examples are commonly referred to as a "soft" credit pull.
However "hard" credit inquiries are made by lenders. Lenders, when granted a permissible purpose by you for the purposes of extending you credit, can check your credit history. Hard inquiries from lenders directly affect your credit score. Keeping credit inquiries to a minimum can help your credit rating. A lender may perceive many inquiries on your report as a signal that you are looking for loans and will possibly consider you a poor credit risk. To keep your credit rating good, try not to let companies access your history unnecessarily.
- Cards you don't use - Although it is believed that having too many credit cards can have an adverse affect on a credit score, closing lines of credit can not improve the score and may even hurt it. The credit rating formula looks at the difference between the amount of credit you have and the amount being used, so reducing the total credit can make the balance carried seem larger and take points off the score.
Understanding credit reports and scores
The Government of Canada offers a free publication called Understanding Your Credit Report and 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 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.
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.
See also
"Credit history"