How Credit Works

What is credit history?

By Donna Freedman
Reviewed by Lauren Bringle, AFC®

You hear a lot about “good credit” or “bad credit,” or people working to improve their credit. What they mean by “credit” is your credit history, which is a record of how you handle your money. [1] That includes factors like whether you’ve taken out loans (including a student loan or auto loan), used credit cards, paid your bills on time, or had issues such as defaults or bankruptcy.

Using data from credit reporting agencies, credit scoring companies, like FICO® and VantageScore develop your credit score, which has an enormous impact on your financial life. It’s essential to build a strong credit history, or to take steps to repair a substandard one.

Why is it important to have a positive credit history?

When a lender sees that you’ve handled credit responsibly in the past, they’re more likely to want to lend to you. But if your credit history is not great – maybe you owe a lot of money, or you often make late payments – then you may not get approved or you won’t likely get favorable terms for loans, including mortgages.[1]

In fact, you might not get a loan at all from a conventional lender – and alternative sources like online personal loan lenders and subprime loan lenders tend to charge higher interest rates and may tack on extra fees.

Insurance companies, landlords, and potential employers might also review this information[1] A negative credit history could even mean paying more (including security deposits) for utilities, cable or a smartphone.[2]

What is a good length of credit history?

The length of your credit history does have an impact on your overall score and what counts as a good length for a credit history depends on a variety of factors.

One study by FICO® [3] found that people with the highest credit scores ranging between 800 and 850 had an average credit history length of 99 to 128 months, which is roughly between 9 and 11 years. However, this doesn’t mean your credit history has to be as long as this in order for it to be classed as ‘good’. A good credit score (between 670 and 739) can be achieved in a much shorter time, but it depends on a wide variety of financial factors.

Insufficient credit history vs. bad credit history

Neither one is good! But both can be fixed.

What is insufficient credit history?

Insufficient credit history is just what it sounds like: You don’t have enough (or maybe any) experience with loans or credit cards.

Lenders, landlords and others won’t know if you’re a good credit risk because they’ve got nothing to go on. Taking steps like applying for a credit card or taking out a credit builder loan can help you get started with building up your credit for the first time.

What is bad credit history?

A bad credit history means you’ve had experience – just not the good kind. Things like consistently late payments, a high ratio of credit utilization on your credit card, defaults, accounts sent to collections and repossessions can lead to a poor credit history and bad credit score.

Having an adverse credit history

A bad credit history can also be known as an adverse credit history. Both terms mean you haven’t been responsible with credit in the past, and this can make lenders wary of trusting you with future credit. Having a bad or adverse credit history will typically mean you’ll have a lower credit score.

Building better financial habits can improve your credit history and lenders and others may be more likely to work with you. (For a step-by-step guide, see “How to Build (Or Rebuild) Credit.”)

What is a good credit history?

Having a good credit history means you have been responsible with credit, made repayments on time and have a positive history with your credit accounts.

People with a good credit history usually should not have a problem being approved for loans and other forms of credit, although be aware that other factors like debt-to-income ratio are also taken into account when you apply for credit.

What is the difference between a credit report and credit history?

As noted earlier, your credit history is an ongoing record of your financial habits including repayment of debts like credit cards and loans. Your credit report is a statement of that information and a summary of your current credit status.

Creditors/lenders provide your payment information on credit cards, personal loans, auto loans and mortgages for example to the major credit bureaus: Equifax, Experian and TransUnion. This becomes your credit report, an accumulation of all of the information provided by each creditor and lender, which is available to potential lenders, landlords, banks and employers.

It’s a good idea for consumers to check their credit scores and credit reports, too. If there’s information on there that you don’t recognize, it could be a simple clerical error that you could dispute with the creditor and have corrected. However, it could also be a sign of identity theft.

Note: You don’t have to pay to view your credit report. Each year you are entitled to one free credit report per year from each of the bureaus.[4] Every four months, order a free report until you’ve gotten them from all three bureaus. Do this every year to protect your credit history and your good financial name.

How do those two things affect your credit score?

Both an insufficient credit history or a bad credit history will negatively affect your credit score.

An insufficient credit history means the credit reporting companies don’t have many trade lines to generate a credit score because you generally need one or two accounts that have been active for at least three to six months. If you’ve never opened any kind of credit account, you won’t have a credit score at all.[5]

Why is your credit history different with different credit bureaus?

Simply put, not every lender reports to all three of the major credit reporting agencies. For example, you may have a personal loan at company A that only reports to Equifax, while your car loan through company B reports to TransUnion. In this case, your credit reports at the two bureaus will look a little different, because they show different pieces of your credit history.

Note: not all lenders pull from each major credit bureau when they check your credit during applications either.

That’s why it’s important to both check your credit history at each of the major credit bureaus. After all, having a credit history with Equifax doesn’t help if you apply for a loan at a company that only pulls from Experian, for example.

Since each credit bureau may hold slightly different information about you, your credit score can look different depending where you check it.

The best-known credit scoring model and most widely used by lenders was developed by Fair Isaac Corporation, FICO®. Each credit reporting agency uses FICO’s credit scoring model to calculate their own versions of a FICO score.

Your FICO score from Fair Isaac is “bureau-specific,” which means you’ll get three slightly different scores. That’s because not every single creditor reports to all three bureaus, so credit scores may be calculated differently.

Your credit scores and reports might also vary for other reasons:[6]

The day the score was calculated or your credit report pulled. For example, maybe you have no credit card balances one week, and the next week you buy new living room furniture on your credit card and it impacts your credit utilization due to the timing.

Inaccurate data. Mistakes happen, which can cause your credit information to appear on someone else’s report. Or for someone else’s to appear on yours – and if that person has bad financial habits, your score might be negatively impacted.

Lag time. Creditors could report to the bureaus at different times, which means Bureau A has info that Bureaus B and C don’t have yet.

How can you build credit with no credit history?

No one is born with great credit! You have to build it from the ground up.

This is challenging because you can’t build a credit history without using credit – but it isn’t always easy to get credit without having any credit history. Here are a few ways to get started on building a credit history:

Become an authorized user. Ask someone with strong money habits to add you to one of their credit cards. You’ll get the benefit of that person’s good credit history by using the card as an authorized user.

Get a secured credit card. Secured credit cards carry a low spending limit (often $300 or less) and require you to put secure the credit limit with a cash security deposit, in a certificate of deposit or savings account.[7] To obtain the greatest benefit make sure the lender reports to all of the major credit bureaus.

Apply for a store credit card. Store cards may be slightly easier to get. However, they also tend to have a high interest rate, so be careful not to overspend and pay your balance in full every month so that you do not accrue interest charges.

Look for a cosigner. A relative or good friend might be willing to cosign for your personal or vehicle loan. If you do have a relative or good friend, be sure to have a solid repayment plan because should you default, the cosigner is on the hook for the full amount.

Take out a credit builder loan. You apply and once approved, the lender puts the proceeds of the “loan” into a savings account or certificate of deposit. Depending on the lender, the term can typically be anywhere from 6 to 24 months. You make monthly payments which get reported to the credit bureaus. When the term ends, you get your money back, minus interest and fees.

Note: Self offers these credit builder accounts online or through a mobile app.

The bottom line

The high cost of bad credit can hold you back financially. You’ll have trouble getting good rates for credit cards or for personal, auto or mortgage loans – and all the extra money you pay out in interest is money that can’t work for you in more positive ways.

Take steps to create and maintain a strong credit history. Doing so will help you meet your financial goals and live your best life.

About the author

Longtime personal finance writer Donna Freedman lives and writes in Anchorage, Alaska. See Donna on Linkedin or Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial – a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin or Twitter.


  1. FTC: Understanding Your Credit
  2. Find Law: Utility Credit: Fast Facts
  3. FICO® Score High Achievers
  4. FTC: Free Credit Reports
  5. Experian: Is It Possible Not to Have a Credit Report?
  6. MyFICO: Why Are My FICO Scores Different for the 3 Credit Bureaus?
  7. Consumer Finance: Building Credit From Scratch