F I N A N C I A L E D U C A T I O N
Why your credit history
Potential creditors—such as mortgage lenders and credit card companies—use the information in your credit history to decide whether to extend credit to you. The information in your credit history also is used to calculate your FICO score. When creditors review your credit history, they assess several factors: recent activity, the length of time that credit accounts have been open and active, and the patterns and regularity of repayment over longer periods of time.
Your credit history is a measure of your ability to repay debts and demonstrated responsibility in repaying them. It is recorded in your credit report, which details the number and types of your credit accounts, how long each account has been open, amounts owed, the amount of available credit used, whether bills are paid on time, and the number of recent credit inquiries. Your credit report also contains information regarding whether you have any bankruptcies, liens, collections, or judgments.
Potential borrowers who have no credit history—for example, college-age young adults—may have difficulty being approved for substantial financing or leases. Landlords might decide not to rent an apartment to an applicant who has no credit history that demonstrates their ability to make payments on time.
You can establish a credit history in several ways, including taking out a small personal loan or applying for a credit card with a small available balance. Such usage lets you demonstrate how well you can manage your credit on a limited scale before taking on larger amounts of debt. You also can open a joint credit card with someone with a good credit history, or open a secured credit card, which is backed by an amount of money that you put in a savings account.