Understanding Your Credit History Is the First Step Toward a Higher Score

I have heard from numerous readers who were confused by a recent column on how to clean up your credit history (also known as a credit report) and credit score.

So I'll try to clarify.

First, your credit history also includes personal factual information, such as your name, Social Security number, current address, and how long you have lived at your current address and past addresses.

Your credit history is primarily a list of the financial activity in your life. It lists all of the credit accounts you have ever opened and how long they have been open, including credit cards, mortgages, home-equity loans, student loans, car loans, personal loans (provided that those were reported to the credit reporting bureaus), layaways and any other type of credit or lending account you might have.

In addition to listing each of these credit accounts, your current balance and your highest balance, your credit history provides information on your payment history. If you have made every payment on time for as long as you have held the account, your credit history will note that. If you have missed a payment or two, it will list how late you were and whether the account is current or you are behind in your payments.

Your credit history will also include any charge-offs -- an amount you owed that the creditor has decided you will never pay, so the company has charged off the amount as a loss, and likely sold it to a collection agency -- tax liens, court judgments and overdue child support.

Negative information like this will stay on your credit history for up to 10 years. Late payments will stay on your credit history for up to two years, but like all negative information, it will affect your score less with time.

And finally, your credit history also lists "inquiries." Every time a prospective lender, creditor, landlord, insurer or employer pulls a copy of your credit history to see how it looks, it's called an "inquiry."

Your credit score is different from your credit history, although the two are related. It is a number from 300 to 850 (on Fair Isaac Corp.'s FICO scale, which is the credit score most often used by mortgage lenders). The number is calculated by assigning a value to each piece of your credit history. The numbers are crunched, with different pieces of your credit history assigned a different weighting.

For example, your payment history is worth 35 percent of your total score. That's why a late payment or two can dramatically lower your credit score. The amount you owe is worth 30 percent of your score, which is why if you borrow up to the maximum on your credit cards it will lower your score.

How you manage new credit is worth 10 percent of your score, and how many types of credit you use is also worth 10 percent of your score. So you will have a higher score if you have a mortgage, credit cards and a car loan than if you just have a mortgage. However, don't take on more debt just to have more accounts. Just having accounts open, but without balances, can help.

How long you have owned your credit accounts is worth 15 percent of your total score. This is the point that seems to be most confusing to readers who are concerned about canceling a credit card.