Personal Credit History

What is Personal Credit History?
The details of loans availed and subsequently repaid by a person are maintained in the form of a record that can be reviewed by any legitimate business entity. This record, better known as personal credit history, includes the following information: lines of credit available to an individual, history of payments including details of late payments, bankruptcy filings if any, number and types of credit accounts and the length of time during which the accounts have been operational. Information regarding recent credit inquiries are also documented in this report. In the US, the credit bureaus, viz. Experian, TransUnion, and Equifax collect the relevant information pertaining to a person's credit history.

Relation Between Credit Score and Credit History
Credit scores are a measure of the expected credit risk or the risk that the borrowers would default on their loan payments. Credit scores for individuals are calculated by the aforementioned credit bureaus using the person's credit history. Credit bureaus assign the following weights to factors while calculating credit scores: 35% to previous credit performance, 30% to current indebtedness, 15% to the use of time credit, 15% to the types of credit available and 5% to new credit. It's evident that personal credit history is the most important factor influencing the credit scores. These scores are calculated using a standard formula developed by the Fair Isaac Corporation in the year 1958. Hence, the credit scores are also known as the FICO scores. Credit scores range between 300 and 850 and are a measure of the credit worthiness of the borrower. A high credit score, especially one above 700, is considered optimal by the lenders. Since each of the bureaus calculates a credit score, a person has 3 credit scores at any given point in time.

How to Obtain a Credit Report?
A detailed report of a person's credit history is prepared by the 3 credit bureaus. In addition to these bureaus, there are other companies or consumer reporting agencies (CRAs) that gather and maintain information regarding people's credit activities. The credit bureaus operate nationwide while the other smaller CRAs serve local markets. A credit report contains the following information: personal information such as name, address, phone number, social security number and employment history; the person's credit history; accounts information and information on how to settle disputes regarding the details contained in the credit report.

Consumers: According to the Fair Credit Reporting Act (FCRA), people are entitled to receive one free credit report, annually, from each of the nationwide consumer credit reporting agencies or credit bureaus, viz. Equifax, Experian and TransUnion. People can contact the credit bureaus directly and ask for a copy of their credit report. In addition to this free copy, people can buy credit reports, from the credit bureaus and other consumer reporting agencies, as and when required.

Others: The credit bureaus sell credit reports to the following entities: loan providers, prospective and current employers, insurance companies that are going to insure the person or renew an existing policy, government agencies that review the financial status of individuals, landlords and other legitimate business entities requiring the information. In case of court orders or federal jury subpoenas, the credit bureaus are expected to furnish the requisite information.

Importance of Credit Report
As mentioned earlier, many business entities make use of the information contained in the credit reports. Decisions, like whether to grant a loan or a line of credit or to issue a new credit card, are taken by the lenders on the basis of the information contained in the credit report. Lenders can decide not to grant loans if they feel that the credit report is unfavorable. If a consumer has been denied a loan, on the basis of the information contained in the credit report, he/she has the right to challenge the information contained in the report.

People who do not have a credit history or have a bad credit history will find it difficult to procure a loan. A good credit score will result in the lender charging a lower rate of interest on the money lent while a poor credit score may make it difficult for a consumer to avail a loan at a favorable rate of interest. Hence, people should focus on building a good credit history since a poor credit history acts as a deterrent to availing timely and affordable credit.