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What Is Credit History, and How Does It Work?

A borrower's credit score is derived from their credit history.

Chris Scott

Contributing Writer at Tally

May 5, 2021

Approximately 40% of Americans don't understand how their credit score works. A credit score is a three-digit number that indicates to lenders how creditworthy a borrower is. The credit score is essentially a summary of a borrower's credit history. 

We're here to outline everything you need to know about your credit history. We highlight what your credit history is and how it works, including the components that go into establishing it. We also cover the do's and don'ts of how to spend and borrow money if you're looking to improve your credit history. 

What is credit history? 

In short, your credit history is a breakdown of all of your credit accounts and payment history. It shows how well you've managed to repay credit cards and loans, both in terms of whether payments were made on time and in full. 

Your credit history is recorded on your credit report. Your credit score is then created from this credit report. So, your credit history directly influences your credit score. A bad credit history can prevent you from: 

  • Opening new credit cards.

  • Securing a mortgage.

  • Taking out loans, including auto loans and student loans.

The credit reporting agencies each view credit history differently. So, let's take a closer look at how your credit history works. 

How does credit history work? 

You work with a lender whenever you borrow money, including: 

  • Credit cards.

  • Lines of credit.

  • Personal loans.

  • Mortgages.

  • Home equity lines of credit (HELOCs). 

  • Student loans.

  • Auto loans.

Every month, your lender reports your repayment history to at least one of the three major credit bureaus: 

  1. ​Experian.

  2. ​Transunion.

  3. Equifax.

These credit reporting companies then take the provided information about your credit history and convert it into a credit report. Your credit report serves as a complete record of your credit history. It represents all of your open accounts, even if you work with different types of lenders. 

Your credit report displays: 

  • How long your accounts have been open. 

  • Your payment history and whether you've missed any payments. 

  • Your current unpaid debt.

  • Your credit utilization, which is a measure of the amount of credit you're using compared to your total credit limits.

  • Your total available credit.


  • The different credit accounts you have open. 

  • The number of credit inquiries on your account over the last two years. 

The information on your credit file is then converted into a three-digit score that measures your creditworthiness. There are two types of credit scores available: the FICO score and the VantageScore

Each score weighs data differently when measuring your credit risk. The FICO score is determined based on the following: 

  • Payment history = 35%.

  • Outstanding credit balance = 30%. 

  • Length of credit history = 15%. 

  • Credit mix = 10%. 

  • New credit = 10%. 

The VantageScore 4.0 credit scoring model, on the other hand, determines its score differently: 

  • Payment history = 41%. 

  • Age and mix of credit = 20%. 

  • Utilization = 20%. 

  • New credit = 11%. 

  • Outstanding balance = 6%. 

  • Available credit = 2%. 

Though the scoring models weigh them differently, all of the criteria above are ultimately a reflection of your credit history. They're a complete summary of your personal finance habits and how you go about borrowing money. 

The do's and don'ts to improve your credit history 

Improving your credit history takes time. It requires patience, persistence and dedication. Below are some of the do's and don'ts to help improve your overall credit history. 

Do: check your credit report 

The Consumer Financial Protection Bureau allows you to receive a free credit report from each of the three major consumer reporting companies every 12 months. You can request your free copy at

Checking this report annually is good practice, as it allows you to verify that the information on it is accurate. This not only includes your personal information — like your name, address and Social Security number — but also your credit history. If there is negative information on the report that you believe should not be there, you can dispute it with the credit bureaus. 

The Federal Trade Commission conducted a study that found that 20% of consumers discovered a mistake on at least one of their credit reports. The information is often incorrect not because of the credit bureaus but because of the lenders providing the information. 

Do: pay off debt

If you carry a lot of debt, you can be doing a lot of damage to your credit history. Your credit utilization ratio measures the debt you're using versus the total debt you have access to. Typically, lenders like to see this number below 30%. 

Additionally, there are some lending options, like credit cards, that come with high interest rates. Not paying off debt causes you to accumulate interest, making it even more difficult to pay everything back. Paying off debt saves you money and improves your credit history. 

If you're looking for assistance paying off debt, be sure to check out Tally. Tally is a credit card payoff app that automatically pays your credit cards in the most efficient way possible. Not only will you quickly pay off your high-interest cards, but you'll reduce your credit utilization ratio and show a trend of on-time payments — two things that lenders love to see on your credit report. 

Don't: miss payment deadlines 

Whether a credit card or a loan, it's important that you meet your payment deadlines. A loan will have a fixed amount that's due every month. A credit card will have a variable amount due, based on how much you spend. But there will be a minimum required payment and due date on your credit card statement. It's important that you, at the very least, make the minimum payment on time

Missing payments comes with consequences. If you miss payments on your mortgage, you risk foreclosure and losing your home. If you miss payments on your credit card, you're subject to late fees and penalty APRs, causing your interest rate to increase. 


Missed payments will also damage your credit history. Depending on your credit score, a single late payment can cause your FICO score to drop by as much as 180 points. Both FICO and VantageScore value payment history as the most important criteria in determining credit scores. 

Don't: attempt to open too many credit card accounts 

When you go to open a new credit account, the lender will perform either a hard or soft inquiry. A soft credit inquiry occurs when you check your own credit report or when a lender quickly checks your score to preapprove you for an offer. Soft inquiries do not impact your credit report. However, to eventually open a new account, the lender will need to conduct a hard inquiry. 

A hard inquiry allows the lender to review a copy of your credit report. Hard inquiries show up on your credit report and stay there for two years. This is one of the reasons why you should be strategic in reviewing credit card companies, only applying for cards where you know you'll be approved. 

For instance, if you have a low credit score and routinely apply for cards that require a good credit score, you will continually be rejected. These hard inquiries are a part of your credit history and will show up on your credit report, ultimately lowering your score. 

Improve your credit history for a better financial position 

The term "credit history" can be a bit broad. Essentially, it represents a summary of your borrowing history. How many different accounts do you have? How often do you try to open new accounts? Do you make payments on time? 

Your credit history is important for achieving your personal financial goals. Lenders report your credit history to the three major bureaus, who then produce your history onto your credit report. This information is then used to craft your credit score, which indicates your creditworthiness to lenders. Poor credit history can have long-lasting implications. 

Fortunately, there are some things you can do to improve your credit history. Routinely paying off debt and making on-time payments is a great place to start. Reviewing your credit report at least once per year is another way to check for errors and correct any negative information that should not be on the report. 

If you need a boost to help you get started, try paying off your credit card debt with Tally†. Paying down debt is an excellent way to start improving your credit history and, in turn, your credit score.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.