Credit Tip Tuesday #4: The Mystery of Credit History

This week we will look at the third factor that determines your credit score- Credit History. This influences around 15% of your overall score.

What is Credit History?

Your credit history is a part of your credit file and is made up of facts gathered form credit card providers, financial institutions, retailers and other lenders. It details how long your various credit accounts have been in existence. Credit history is a record of a consumer's ability to repay debts and demonstrated responsibility in repaying debts.

How does my Credit History influence my Credit Score?

The credit score calculation typically includes both how long your oldest and most recent accounts have been open as well as the average age of your accounts. In general, creditors like to see that you’ve been able to properly handle credit accounts over a period of time.

What factors affect my Credit History?

Creditors look at many aspects of your Credit History to determine your credit worthiness like-

• Recent Activity- It is a good idea to apply for a credit card or other credit products to build your credit history. But try not to make too many credit applications in a short amount of time. It signals to lenders that you may be over stretching yourself which may affect your ability to repay.
• Length of time that credit accounts are open & active- It is a good idea to keep your older credit cards active, even if you do not use them regularly. Closing a credit card account, you’ve had for a long time may decrease the average age of accounts on your credit history, which could negatively affect your credit scores. In general, creditors like to see that you’ve been able to properly handle credit accounts over a period of time.  
• Patterns & regularity of payments over a period of time- To help build your credit history, try to keep making regular payments (including interest, if applicable) rather than paying off all debts in one go. This helps establish a positive payment pattern which helps improve your credit score

Establishing Credit When You Don't Have Credit History

For many Canadians like students or new immigrants, establishing credit history is an essential way for achieving their financial wellbeing.

• Consider a secured credit card or a student credit card- A secured credit card requires you to make a deposit up front, possibly the same amount as your credit limit. You can use secured credit cards just like an unsecured credit card – to make purchases, make regular payments & improve your credit score
• Consider becoming an authorized user on a credit card- Get an add-on card so you are an authorized user on someone else's credit card account. You get a credit card in your name, linked to the primary account owner’s credit card account.
• Use a co-signer- A co-signer is someone who agrees to be legally responsible to pay a debt if you, as the borrower does not pay back a loan as agreed. You can ask your parents to co-sign on a car or student loan. Please get into this scenario knowing the credit risks to you & your co-signer.

Remember establishing a credit history takes time, so don’t expect things to change dramatically overnight. But over a period of time, good credit habits will translate into a positive credit history.

Disclaimer: The content provided on the Plastk Financial Inc. Blog is information to help Canadians become financially literate and learn about credit. Plastk is not responsible for building or ruining an individual's credit score or credit rating. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment, credit inquiries, and all other decisions should be made, as appropriate, only with guidance from a qualified professional.