You may notice my continual use of the terms ‘credit history’ and ‘credit report’. I cannot emphasize these enough; a good credit history is one of the most important pieces of your personal finance, and a credit report provides a snapshot of your credit history. So what exactly makes up a credit history, and what does a credit report display? This post will answer these questions.
As I mentioned in my first post, a credit history is the documentation of how you managed debts in the past. Typical debts include mortage, auto loans, personal loans, credit cards and unpaid bills. Yes, you read that right – unpaid bills! I have so many friends who, for one reason or another, failed to pay a bill of as little as $10 and got a ding on their credit history that would take years to clean. In one of my future posts I will cover what course of action you should take if you are in this situation, but it’s better if you never put yourself in this situation. Not paying a bill is almost as bad as missing a credit card payment. So do yourself a favor and remember to always pay your bills.
Your credit history is recorded by the three credit bureaus: TransUnion, Equifax, and Experian, similar to how the Social Security Administration keeps a record of your address, job, and whatnot. Some people like to think of their credit history as personal, confidential information. Personal, yes, but confidential, no, not really. Your credit history can be shared between financial insititutions. Each time you apply for a mortage, a loan, or a credit card, your creditor will request access your credit history, and their request will be granted unless you put a lock on your credit history to prevent any access to it.
The “hardcopy” of your credit history, is the equivalent of a history textbook, albeit shorter and more frequently updated. It’s called a credit report. If you’re a typical American, you’ve had at least dozens of credit reports created from your credit history for multiple purposes. For some people the number may be in the hundreds or even thousands in extreme cases. For your reference, I’ve had between 100 and 200. A credit report is generated when somebody reviews your credit history. Most commonly, the only people interested in your credit history are creditors and yourself. The reason there have been so many reports of my credit history is because I’m subscribed to a free credit monitoring service which grants me access to my credit history once a day, and I sure make good use of it!
When creditors access your credit history, what they physically investigate is a credit report. A credit report has limited size; it does not contain every single items on your credit history, only the most recent ones. Over time, old items, such as closed credit accounts, paid-off loans, late payments, bankruptcies, etc. fall off the report. This is how people who were bankrupt can start rebuilding their credit history: they wait for a certain number of years for the bad records to be removed, then start from a blank slate. Imagine if you’re a creditor, and someone applies for a loan from you. You look at this credit report, and find out that he filed for bankruptcy 10 years ago. Does this person seem to manage his finance responsibly and will most likely pay back the loan? Or would you rather extend credit to someone else who has never been bankrupt in the first place? The law is there to give people a second chance.
In the next post, I will tell you what a credit report looks like.