The difference between credit score & credit history.

What’s the difference between a credit score & credit history?

Think of your credit score as my initial impression of you & credit history as my overall view after spending a week vacationing with you.

Or think of your credit score as your outfit & your credit history as your whole wardrobe. You may meet us at the restaurant with a dope outfit on (credit score), but when we go back to your apartment, we see that was your only outfit & you have nothing else in your closet. (Credit history)

There are 3 different credit bureaus. Equifax, Experian, & TransUnion, each with a different scoring model with scores ranging from 300-850. The higher the score, the lower the risk. (Your score may vary on all 3)

Your credit score shows a lender how likely you are to pay & whether or not you’ll pay on time. A difficulty in paying on time is what we call a “slow pay,” meaning that you may pay it, but it’ll take longer. So if you have trouble paying me back on Friday for the $100 I loaned you, then I’m not likely to loan you more when you can’t even pay back less.

(Note: If you pay 10 days late, the lender may asses a late fee & it could affect your relationship with that lender for future loans, but it will not be reported to the credit bureau until you’re over 30 days. That’s when your score takes a huge hit & could drop by 100 points for that one missed payment, so skip the eating out and make the payment.)

Insurance companies also use your credit score to determine the likelihood of making a claim. A lower credit score = a higher insurance rate because you’ve given them an impression that you will make a claim. (& they don’t want to pay out if they don’t have to.)

If you have low credit score & have broken a lease agreement in the past (which is reported to the bureaus too), you could be denied the apartment because your history is telling them that you’ll likely bounce before the term matures.

Think of your credit score as your foot in the door while your credit history determines how wide the lender will open the door.

Other than repayment history, other factors affecting your credit score are debt and inquiries. If they suddenly cut your hours or you lose your job, if you make $5000/month & owe everyone else $4000, the lender will deny your loan because of your inability to pay. Also if I’m the lender & you ask me for a loan, I can see that you’ve been asking others too (inquiries) & may (like others) deny you because you’re showing a liquidity problem.

Your credit score is like having a degree, but your credit history is your experience with that degree. It’s good to have that finance degree, but my 22 years of experience in finance will trump that framed piece of paper.

That’s why you need some experience (history) to go along with your degree (score). As long as you’re responsible, you need at least 3-5 “lines” of credit. Like a Capital One credit card, a furniture loan, and a $1000 loan from your bank. You don’t have to use them all at once (debt drops score, remember?), but you do need build the experience. The more experience (history) the stronger your overall profile.

Building experience is a layering process. You’re not going to go from a $500 credit line to a $50,000 loan, but you can go from $500 to $1500. Then $1500 to $3200. Then $3200 to $5500 etc. & as you do, you’re building both a credit score & credit history at the same time.

Credit is formalized management and you need to start building your credit by buying on credit- not all at once, but over time as you can afford to do so. You’ll pay some interest along the way, but you’ll save interest along the road because you’ll have a great score and history.

Next week we’ll talk about the difference between a credit score and credit history.

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