Why Is Establishing Credit History Important?

mortgage on your home, or get a credit card in your name. When you apply for the credit, your bank, credit card company or mortgage lender uses your credit history to evaluate the potential risk of lending money to you. Your credit history determines whether or not you qualify for a loan, and at what rate of interest you can borrow. Having a good credit history means you get better rates, higher credit limits, and other benefits.

Your credit history plays a major part in how your credit score is calculated. Of the weighted considerations used to calculate your credit score, 35% of your score is based on your payment history, and 15% is based on the length of your credit history. (30% is based on the amount you owe, 10% depends upon the types of credit you use, and another 10% is determined by any new credit you take on.)

If you have demonstrated an ability to repay loans in the past, that is the real meaning of having “good credit.” This is why establishing a credit history is important. The longer you can prove that you have been using the system of credit responsibly, the more likely it is that a bank will look favorably upon your request for a loan.

As you develop a credit history, your credit score will improve and you will have a more favorable credit rating with banks and credit card companies. A good credit rating means lower interest rates and better terms on loans, and a higher approval rating for mortgages, auto loans, and other forms of consumer credit. It may also entitle you to better rates on insurance or even utilities, as many companies can check your credit rating, including prospective employers and landlords.