We study history to understand and learn from our past so that we can improve our future. Similarly, credit history has a bearing on our present and future. All our actions in the past concerning our credit behavior are recorded and presented as a three-digit number ranging between 300-900. This is the credit score. We are aware that higher the number, better the credit score is.
As much as it is important to know that a good credit score is non-negotiable, it is equally important for you to know what the constituents of your credit history are and how it affects your credit score.
A credit history is a mix of many factors from your past credit behavior and each factor carries different weight in the overall credit score.
Additional Reading: How and where can I check my credit score?
Your Borrowings: The first and the foremost factor affecting your credit history is your borrowings, which could be in the form of credit cards or loans. All your active and inactive accounts are shown under this factor. There might be a case that these accounts may not belong to you. For Ex: An old credit card which was offered to you even when you did not explicitly apply for one or a card issued due to a PAN mismatch. When you check your credit score and its factors, it is a good time to review these accounts and dispute the ones that do not belong to you.
Further, all your borrowings are categorized under positive and negative accounts. Positive are the ones where you have been making regular repayments and the negative are those where you have some outstanding amount to be paid. No points for guessing - more the number of negative accounts, the lesser the credit score. If you see negative accounts under your credit history, you should approach your lender and look at clearing the outstanding amount at the earliest.
You may think that if you do not have any borrowings, your credit history may look good. But unfortunately, such profiles do end up with no credit score, which is not good as lenders would not know how to gauge you as a borrower.
Portfolio Age: The next factor that affects your credit history is your portfolio age. Lenders always look for seasoned borrowers. The performance on your oldest credit is vital for your credit history and credit score. The older credit provides more insights into your credit behavior, hence garners more points. Any recent credit provides limited positive points. So, experts suggest not to close any old good standing credit accounts (especially for credit cards). This might bring down your credit score.
Payment History: This is another important determinant of your credit history. Needless to say, regular repayment or timely repayment is required to bring up your credit score. This factor is linked to your borrowings. The negative accounts that you noticed under the section "Your Borrowings" will have a detailed record under the payment history section. The number of times you delayed or not paid your EMI or your credit card bill is shown here. As with borrowings, more the number of delayed or missed repayments, the lower your credit score is.
Credit Card Utilization Ratio: Every credit card comes with a set maximum limit for usage. This figure is arrived at on the basis of the issuer's guidelines, credit score, and debt-income ratio. Generally, as you show consistently responsible behavior towards the usage of the card, your limit may be increased by your credit card issuer.
Consumption of credit is a big factor that determines your credit score. Just because a card comes with a higher limit, it is not prudent to spend the entire amount over each billing cycle. Doing so will portray you as a credit hungry person. The credit bureaus look for a credit card utilization of 30-40% over a considerable period of time. Anything more than that on a consistent basis would be a red mark on your credit history and would, in turn, affect your credit score.
Additional Reading: Is credit score affecting the quality of your life?
Your Mix of Borrowings: Borrowing could be either secured or unsecured in nature. Loans that have assets attached to them as collaterals are called secured loans; good examples of these being vehicle loans, home loans, or auto loans. On the other hand, loans or credit without any asset as a collateral is called unsecured loans. Credit cards and personal loans are categorized as unsecured borrowings.
Your credit history shows a snapshot picture of all your borrowings. If you have more of unsecured borrowings like credit cards and personal loans, then it is not taken as a positive factor. The ideal borrowing portfolio should have a mix of secured and unsecured borrowings. This factor will also come into play when you apply for a big-ticket loan like a home loan. Your borrower would like to see you as a person with a judicious mix of credit, rather than a person subsisting on personal loans and credit cards.
Number of Enquires: Every time you apply for a credit product (a loan or credit card), the lender makes an inquiry with the credit bureau on your credit score. This is also called a hard inquiry. Thenumber of such inquiries over the past one year is a part of your credit history and is a key determinant of your credit score. If you are a kind of person who seizes every offer for a credit card or loan, there are bound to be many hard inquiries. This is irrespective of the fact whether the product was subsequently approved or not.
Frequently applying for credit is not seen as a credit healthy behavior. If are looking to maintain a good credit score, apply for credit only when you actually need it, not on each instance when you are offered a card or loan.
Also, it is pertinent to mention that each time you check your credit score either on the portal of credit bureaus or on fintech companies like us, it is not construed as a hard inquiry and this does not affect your credit score or is a part of your credit history. Such inquiries are called Soft inquiries.
After knowing what forms a part of your credit history, we are sure you are better empowered to take prudent decisions when it comes to remaining creditworthy. A credit score is not built overnight; it takes sustained efforts on your part to ensure that you give equal importance to all the factors affecting your credit history.