What a Normal Credit History Actually Looks Like
Your credit history is a record of your borrowing history and the payments you have made on your accounts. It may include everything from credit cards and auto loans to home mortgages, student loans, collections, bankruptcies and credit inquiries.
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As credit reports change over time, what may be normal for you now might not be normal in the future. And that pattern is typical. While some credit reports are perfect, others are packed with dozens of accounts or have erratic highs and lows.
How Credit Histories Begin
No one starts with a perfect credit score. Usually, credit histories begin with starter credit cards, student loans, secured credit cards or perhaps being an authorized user on someone else’s account.
Your credit report will likely feel thin with just these beginning types of accounts in your file. But just because you don’t have much of a credit history yet doesn’t mean you have bad credit. In fact, you might have to wait six months or more before you even establish a FICO score, according to Experian. To build a strong score might take years.
On a relative basis, this is what “normal” looks like if you’re young, recently moved to the United States or have avoided opening any credit accounts.
On-Time Payments Matter More Than Perfection
The path to a good credit score takes time. One of the best ways to raise your score over the long run is to make all of your payments before the due date. The largest component of a FICO score is payment history, accounting for 35% of the calculation.
One late payment won’t ruin your credit score, but it will certainly drag it down. Repeated late payments can cause real damage.
Unfortunately, you won’t be alone if you have a late payment, or even a charged-off account or one in collections. Many credit reports have these types of blemishes. You could even argue that it’s fairly “normal” to have this type of credit report. But those with clean credit histories generally have all of their accounts marked “current,” with all payments made in a timely fashion.
Some Debt Is Normal, But Maxed-Out Debt Is the Red Flag
The second biggest component of a FICO score is the amount of debt you owe, comprising 30% of your total score. Most normal credit histories show some level of debt, often in the form of a home mortgage, an auto loan and/or a student loan.
Carrying a modest balance usually isn’t much of an issue. But if your account balances are near your limits, it means your credit utilization is high. That’s a no-no when it comes to credit scoring. Lenders like to see that you can access credit without depending on every dollar of it.
Experts generally recommend you keep your balances at less than 30% of your available credit. If you have a credit card limit with a $5,000 balance, for example, you’ll want to keep your balance at less than $1,500. Otherwise, your score could take a hit, even if you never miss a payment.
Old Accounts Can Help Your History
Rather than cancelling old accounts, it’s best to keep them on your credit report as they can still boost your score. Length of credit history accounts for 15% of a FICO score, meaning older accounts can help your score even if you don’t use them.
If you do close an account, it will remain on your report for up to 10 years, according to Experian. During that time, an account in good standing, even if it’s closed, will not ding your credit score. Just make sure you monitor it so you do not miss fraud, fees or forgotten charges.
A Normal Credit File Has a Mix of Types of Debt
Many people have a mix of revolving credit, such as credit cards, and installment debt, such as auto loans and home mortgages. You can actually boost your credit by having a mix of accounts, as that category makes up 10% of your total FICO score.
But there’s no such thing as an “ideal” credit mix, according to Experian. If you’re working on boosting your credit score, you don’t need to take out a car loan just to “improve your mix.” It’s best just to take out the accounts you need as your life evolves and to keep making on-time payments regardless of which accounts you have.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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