Man working with laptop computer and smart phone at homeCredit history is a broad term, but it has a specific role in your overall credit scores. In particular, credit history serves as your financial record when a lender determines your strength as a borrower.

Those with strong credit histories will be more likely to receive more favorable loan terms, which makes it an important factor for your financial wellbeing. But what exactly does “credit history” mean for each of us? And how is it factored into our credit scores? Here is a breakdown of how credit history is determined and why it’s necessary to know more about this somewhat elusive term:

What is a credit history?

Most of us probably don’t give too much thought to our credit history until we have to pull our credit reports. Your credit history consists of two parts — payment history and length of credit. Currently, the FICO® credit scoring model uses payment history as 35% of your overall credit score, while the length of credit history is worth 15%. When you combine these two, it means credit history is 50% of your credit score, which is why it’s worth your time to know what payment history and length of credit involves.

Payment history

Payment history refers to your record of making payments to your creditors. Each creditor you’ve ever conducted business with will report your payment history on your credit reports. Payment history includes payments you made for loans or credit cards as well as any delinquencies, unpaid payments and other public records such as bankruptcy.

Length of credit

In addition to payment information, the date of when you opened and closed your accounts is also part of the equation, which is referred to as your length of credit. Your credit reports show an average age of all your accounts. An older account (especially one with a positive payment history) will show favorably because it indicates you’ve been responsible with payments over a longer period of time. Keeping your older accounts open allows you to continue to build on the positive length of credit.

To better understand what is included in credit history, it also helps to consider what’s not included. Your employment history nor your prior addresses (or length at residence) are factored into this. And if you’re worried about blemishes in your history, you can expect any bankruptcies, settled debts or other derogatory marks to come out of your report after seven years (except a Chapter 7 Bankruptcy, which is 10 years). If you do decide to close an account, it will remain in your credit history for 10 years after closing.

How is it different from a credit report?

At this point, you might wonder if credit history is the same as your credit report. Your credit history is only part of your credit reports. A credit report refers to your total record as a borrower and is related to any business reporting your credit activities.

Each of the three credit bureaus — Experian, Equifax and TransUnion — have their own reports for your credit. The credit reports also include important personal information such as employers, current and past addresses and any public record notices you may have (such as bankruptcies or liens). The credit reports from each of the bureaus are then used to calculate your individual credit score.

Because credit reports contain so much critical information — from credit history to your credit score — it’s essential to evaluate them frequently. You can enroll in a credit monitoring service, alerting you to changes in your credit reports. Not only does this make sound financial sense to know what’s being reported but it also allows you to monitor your credit history and other essential financial information.

Why does credit history matter?

You might assume since credit history is tied to financial choices of your past, there isn’t much you can do to improve the information. You might even wonder if you should pay attention to it all. However, understanding your credit history is vital for the following reasons:

  • Makes up 50% of your overall credit score — When one factor accounts for up half of your credit score calculations, then it’s something you should review. Check your credit history on a regular basis to ensure it’s been recorded properly. Errors could be lowering your score and you don’t even know it.
  • Helps you learn from your mistakes — Even if your credit history is lackluster, the good news is you can impact your credit history going forward by making on-time payments each month and dealing with any discrepancies right away. While you can’t undo what’s happened in the past (unless it’s an error that needs to be removed), you can make proactive choices so your history becomes more positive, which can ultimately lead to a better credit score.
  • Increases your chances of more favorable loan terms — Before handing you a loan, lenders will take a look at your credit history to check for bankruptcy or defaults. If your credit history looks excellent, you’ll probably receive a lower interest rate. If it’s less than ideal, you may have a higher APR, which will increase what you pay over the lifetime of the loan.

In a nutshell

Your credit history plays a crucial role in your individual credit reports and the calculation of your credit scores. Knowing what’s in your credit history (including payment history and length of credit history) can lead to a better understanding of credit management.

The good news is there are several steps you can take to improve our credit history. Making payments on-time, regularly monitoring your credit reports, keeping older accounts open and staying on top of debt collections can all help improve your overall credit report and score. And positive credit history can go a long way in building your strong financial future.