What is a Credit History?

Your credit history is a record of how you’ve paid your credit cards, loans, and other bills. Your credit history is collected in your credit report and measured with your credit score. Most of your credit cards and loans will automatically be included on your credit report. Other bills like utility payments aren’t included in your credit report, but can be added if you become seriously delinquent and the account is sent to a collection agency.

How to Build a Good Credit History

You’re in control of your credit history. How you borrow and repay money will determine whether you have a good or bad credit history. Here are some things you should do to build a good credit history.

Open a Credit Card

To start building a good credit history, you need some type of credit account that you can use to start showing you know how to handle credit responsibly. If you’ve never had a credit card, start with the bank where you have a checking or savings account. You might also ask a parent to add you as an authorized user to one of their credit card accounts. Only be added to an account that is in good standing.

Retail stores are known to give credit cards to consumers who are just beginning to build a credit history, so you may start there if you can’t get a bank credit card.

A secured credit card is a final option. This is a credit card that requires you to pay a deposit to secure the credit limit for the credit card. A secured credit card is a good option if you’re just starting out with credit and can’t get any other credit card.

Note: Starting February 22, 2010, if you are under 21, you must show that you have income to pay your credit card bill or have a co-signer to get a credit card.

Pay Your Bills on Time

How you pay your bills has a significant impact on your credit history. Your credit score – the numeric version of your credit history – is mostly made up of your payment history. Late credit card and loan payments are included on your credit report for seven years. They will have a less significant impact as they get older, but potential creditors and lenders will still be able to see that you were once late on your credit card payments.

Late payments lead to some of the worst credit report listings – foreclosure, repossession, and student loan default. It often takes months of missed payments for any of these to happen, but once any of these is on your credit report, it can devastate your credit score.

Keep Credit Card Balances Low

The second most important part of your credit history is the amount of debt you carry. Lenders want to see that your credit card balances are low enough for you to pay off without trouble. So, as your credit card balances rise above 10% to 20% of your credit limit, it looks bad for your credit score.

Instead of charging high balances on your credit cards, keep your balances low (between 10% and 20% of your credit limit) to help build a good credit history.

Have Both Credit Cards and Loans

Showing that you have experience with different types of credit accounts will help you build a good credit history. Rather than having only credit cards or only loans, try to have some of both. Avoid opening accounts simply to try to get credit score points in this area. Instead, open accounts as you need them. For example, take out a loan when you prepare for college or a mortgage loan when you’re ready to purchase a house.

Apply for Credit Only When You Need It

A sign of creditworthiness is that you’re not taking on more credit than you can handle. One of the ways you demonstrate this is by keeping your credit card applications to a minimum. Each time you apply for a new credit card or loan, the bank has to check your credit report. These credit report inquiries affect your credit score for 12 months and stay on your credit report for 24 months. Within that period of time, only apply for one or two credit cards or loans to build a good credit history.

Leave Your Credit Cards Open

You need credit cards to help build your credit history. It’s rare that closing a credit card will do anything to build your credit history. Instead, it’s more common that a closed credit card will hurt your credit score, especially if you still have a balance on the credit card when you close it.

Slow and Steady Wins the Race

A good credit history won’t happen overnight. Instead, it takes years to build a solid credit history, so don’t rush. Use your credit card responsibly and the good credit history will come.

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