Credit History, as it says is a history or record of your credit. Compiled from a number of sources such as banks, credit card companies, collection agencies and governments, it highlights how responsibly you repay your debts, credit card bills and any loan EMIs.
The credit history consists of information such as number and types of credit accounts, the duration of your credit card account, amounts owed, available credit used, timely bills payment, number of credit inquiries etc. There are two types of enquiries that can be initiated towards your credit history.
A bank contacting the credit bureau upon receipt of your loan application is a hard enquiry. If you contact the credit bureau to enquire about your own report it is called as a soft enquiry. A hard enquiry is mentioned on the credit bureau report whereas a soft enquiry is not.
When you apply for a loan say for e.g. personal loan, banks send your application information to the credit bureau. The bureau then matches the name, address and other identifying information with your financial information the bureau already has. The compiled records are then sent to the bank in the form of a report along with a credit bureau score. Banks then determine your credit worthiness and look at your ability to repay the EMIs. Banks like to see how if you make your payments on time and then approve or reject your application.
Information such as balance maintained in savings bank account do not typically involve credit unless linked to a loan account, so in most cases do not affect your credit history. Likewise income and age while applying for a loan do not affect your credit history. Your credit score is nothing but a result of a mathematical algorithm dependent on your credit history.
Maintaining a healthy credit history is important to help you get a loan quickly, smoothly and maybe with attractive terms. It gives you a sense of security that your loan application will not be rejected. A healthy credit history is an indication of your financial reliability and trustworthiness.
Now that we know what Credit History is and its importance, let us now look at 5 ways to maintain a good credit history
- Be self-aware
Apply for your credit bureau report from the credit bureau and check for any reporting errors with regards to your history. There could be some discrepancies with regards to closed loan account not mentioned or incorrect credit limit
Also, check for frauds or identity thefts. Report them to the credit bureau immediately or else your credit history will retain these errors.
Ensure that you always keep your credit history updated. Any change in phone number or residential address should be reported to the credit bureau.
- Pay your bills on time
Have the self-discipline to always be prompt while paying your credit card dues or loan EMIs. Ensure your pay your credit card balance in full as revolving credit to the next month could slowly end up in credit card debt. By being prompt towards credit card dues, your credit history remains good whereas any defaults will affect your credit bureau score and viewed negatively by banks.
Set up auto debits or auto payments to ensure you are not hit with late payment penalties. Having a payment schedule is a good habit to have so that you do not miss out on payments.
Provide the bank with standing instructions to debit the monthly payments from your account towards EMI amounts and credit card bills.
In case you are a loan guarantor or co-applicant for a loan, ensure that timely payments are made towards the loan. A default could ruin the credit history of the borrower including yours as a guarantor. You are equally liable for missed payments if being a guarantor or co-applicant.
Try avoiding reaching the maximum limit on your credit card. The more you use it above the limit, the more negatively it will show on your credit score. It is wise to utilize only up to 50% of the credit limit each month. Always remember when using the credit card, you are actually making use of money taken on credit and utilizing the money inside the credit limit will make you too reliant on borrowings.
- A healthy mix of credit
It is ideal to have a mixture of credit in terms of both secured and unsecured loans. Secured loans include home and car loan whereas unsecured loans include personal loan and credit cards. Loan providers like bank believe that your risk of default will increase if you have been exposed to more unsecured loans. They find it safe to lend towards secured loans. Hence the interest rates for unsecured loans are higher than that for secured loans.
It is not true that not having taken a loan or owned a credit card at all can help you have a good credit score. Banks like to look at a long credit history to judge your current payment capability. Not having any credit at all could damage your credit bureau score. In contrast, Digital lending platforms look at your current financial capabilities to provide personal loans for salaried professionals who have never availed a loan before.
As per banks the ideal credit history should contain a mix of a home loan, a car loan and maybe a couple of credit cards.
- Keep credit utilization at a low
Keep your credit utilization at a low by not spending too close to your credit limit consistently.
Do not apply for multiple credit cards or loan products at the same time. Every time you apply for credit, a hard inquiry is raised regarding your credit history and score. Too many enquiries in a short span of time have a negative impact on your credit history because it implies that you are desperate for credit and are applying at several sources simultaneously.
Decrease your credit utilization ratio by paying as much as you can towards your credit card balance each month. Pay more than the minimum balance which increases your available credit and decreases your utilization ration faster.
Apply for credit only when you think you qualify for it and have a good chance for approval.
It would be wise if you look at your credit report, strengthen the problem areas and then apply for a loan or credit card.
- Close new rather than older accounts
Closing old credit cards shorten your credit history. Banks prefer to look at borrowers with longer credit history to have a longer track record for evaluation. If you do however want to consolidate your credit card debt for example, pay off and close your new cards while retaining older cards.
When you close a credit card, the credit card issuing company no longer sends updates to the credit bureaus and the credit algorithm places less weight on inactive accounts. Losing this credit history will shorten your average credit age and cause your credit score to drop.
However, if you are new to credit and want to maintain a strong credit history start with a personal loan from a digital lending platform where, even with no loan availed before, you can still get a quick and easy personal loan.
Maintaining a healthy credit history is not hard if you commit to paying all bills on time and avoid defaults. It will also improve your eligibility for any bank loan offers and credit when you need it.