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Understanding Credit History and Why It Is So Important

Your credit report is a history of your borrowing and repaying activity. It includes information about where you live, whether you have ever filed for bankruptcy; how much debt you owe; how faithfully you have paid your bills; and any court judgments, liens, or unpaid debts that are listed against you.

All of this information is used to calculate your credit score. It’s important to remember that while no score is perfect, the best way to improve your credit rating is to make all of your payments on time and in full.

There is no standard “good” or “bad” score. Though many lenders use FICO scores to help them make lending decisions, each will still use its own measures to determine whether someone should or shouldn't qualify for financing.

What Story Does Your FICO Score Tell

The most critical factor in your credit report is payment history. Lenders want to know whether you pay your bills on time, every time. The next most important factor is the amount of debt you have compared to the amount of available credit you have to use. The third factor is new credit versus long-standing credit accounts, like mortgages or car loans versus store cards and department store cards.

After these three factors come other factors like the length of time you have had your accounts open and the types of accounts you have opened, including retail accounts or installment loans such as a car loan.

It is critical to note that:

The Weighted Average Formula used by Fair Isaac Corporation (FICO) takes into account all the five factors that credit scores are based on, including Payment History, Amounts Owed, Length Of Credit History, New Credit, and Types Of Credit In Use to determine if you are likely to repay debt as agreed.

Each factor is considered with equal weighting when determining your overall score. Still, they each hold varying levels of importance depending on the data in your credit report at any given time. That's why it is impossible to point out any one factor as more important than another at any given time. It could change tomorrow depending upon the new activity on your credit report.

When you go to borrow money, the lenders, apart from your FICO score, may also consider information like your income, the length of time you have been working at your job, and other factors. Their final decision depends on how they feel about their risk if something happens within your life that might affect your ability to pay.

Your credit score reflects all the positive and also negative factors in your credit report. If you make your payments on time, your score rises, while late payments are lower. The credit scoring system is designed to reward people who pay their bills on time and punish those who don't.

Improving your FICO score is a bit like going to the joy. It's not easy, and you won't see results right away. But stay consistent, and you'll see how much better your life can be by raising it! Start off by paying off your credit cards each month. Then work on paying off your car loan. It's a good idea to have a mix of different types of loans for your credit score.

Then, keep an eye on your credit report. If you see mistakes, make sure you contact the credit agencies and fix them. With these steps, you'll be well on your way to raising your credit score and seeing the benefits! Learn more about raising your credit score here.

Future property owners reading terms of contract

Payment history

This is the most crucial factor in determining your score. Your history with paying bills on time is what lenders are looking for when they review your application for a loan. In general, you want to pay your bills on time and avoid making late payments.

If you have any late payments in the past six months, it will seriously hurt your chances of getting approved for a new loan or credit card account. Payment history comprises 35% of your FICO score.

Tips to improve your score:

  • Pay your bills promptly
  • Do not miss payments
  • Pay your credit card debt
  • If you cant pay your bill/debt on time, get help

The length of your credit history

This is also important because it shows that you’ve been able to keep accounts open for long periods (which suggests a good payment record). Maintaining open accounts is also essential because it lowers your risk if a creditor decides to close one of your accounts and transfer the balance to another card (this can hurt your FICO score). Length of credit history makes up 15% of your FICO score. Want to know how your credit score affects your home buying process? Read here.

The amount of debt you owe

The higher your debt, the worse off you are in terms of your credit scores. Lenders assume that people who carry high balances are more likely to miss payments, so they will have to pay higher interest rates to compensate for that risk. Credit scoring formulas also penalize you for having multiple late payments on your record. Amounts owed account for 30% of your credit score.

Helpful tips:

  • Make and live by a budget
  • Pay high-interest loans first
  • Consolidate debt to lower interest rates
  • Don’t borrow more money

New credit

This is based on how many recently opened accounts you have versus how many older accounts there are in your history. Someone who applies for many new accounts in a short period could be viewed as riskier than someone who has been using their existing lines responsibly. New credit makes up 10% of your FICO score.

Tips to improve your score:

  • Apply for credit only when you crucially need it
  • Create a solid plan for repaying your old and new debts

Types of credit

Another 15 percent of your score is based on the type of credit you use. Someone with several types of accounts, such as mortgages and car loans, will likely have a higher score than someone who only uses one type of account, such as a credit card.

Helpful tips:

  • Have a mix of credit types
  • Track your payments
  • Pay your credit card bills on time

The number of credit inquiries

The number of inquiries you have in 24 months isn't included in your credit score. For example, applying for four credit cards in one day won't affect your score because there's no period specified.


Credit history is important because it can affect so many aspects of your life, including your homeownership, your ability to get a loan or credit card, and even your job or career. You want to be sure that you take the time to understand your credit report.

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