One of the most important components of your financial life is your credit history. This a bit like your financial report card. It is a record of your borrowing and how you pay back your debts. Over time, you build credit history.
The three main companies who track credit history are Experian, TransUnion, and Equifax. These agencies actually take all of your credit transactions and turn it into a single number, referred to as your credit score, grading your financial picture.
You get credit history over time. It will be good if you pay on time and don't overextend yourself. It will be bad if you are in the arrears and don't pay your bills. Banks and other lending institutes rely on your history of credit to determine whether to lend you money and what interest rate they will charge you.
But your credit history isn't just used by lenders. Landlords, insurance companies, and even employers also rely on this information to establish a pattern of reliability. The idea is if you pay your bills on time, you are much more reliable than someone who doesn't.
You build credit history over time. Any lender considering a loan to you can get your history from the credit agencies. To save a lot of time they simply look at your credit worthiness by looking at your credit score.
The higher your credit score the more credit worthy you are. It indicates that you'll make your payments on time and that there's little risk you'll default on your loan. The lender will almost always approve your application and offer you the lowest available interest rate.
The opposite occurs if you have a low score. This low score indicates you are not creditworthy. It means you aren't reliable in paying your bills on time. You are also seen as a risk for defaulting on your loan. As a result there is a possibility your loan will be denied. If it is approved you can expect to pay significantly higher interest rates.
There is a new scoring system called VantageScore that is being slowly implemented by the three main credit agencies. It will use letter grades like a report card. A score of 901 to 990 would be an A, while a score of 501 to 600 would be an F. While not yet widely used, you can expect to see it become mainstream soon.
Credit history may be hard to change. After all the past is the past. But did you know there are ways to improve your credit score regardless of what your past credit history looks like. There are programs on the market that will show you how to accomplish this, without the services of a credit counseling.
Once a year you are entitled to a free copy of your credit report. Take advantage of it. Check your credit history and look for errors. If you find any you'll need to file a dispute with the credit agency.
Your credit history is important. Learn how to build credit history that's solid and stands the test of time.