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I just read a question on having credit history in the UK. The credit-history phenomenon has puzzled me for some time. Similar to people considering it a good thing to have many credit cards.
What is the relevance of a credit-history? Except for a mortgage and 2 credit cards I never had any substantial outstanding loans. What does this tell me about my credit history and should I care if I relocate to the UK or the US?
From my experience in the US (and some of it applies to Germany as well), for lack of a central registration of address office which is accessible by the private sector, a credit history is often used as a substitute, i.e. to validate that a person who claims to have a past actually lived at that point in time under the given name.
For example, in the US even if you wanted to buy a car with cash only, a car dealer might refuse to if you don't have a credit history at all. In Germany, as another example, you might not be able to get a prepaid cell phone contract if there's no credit history at any of the provider's private sector partners.
In many cases the credit history also provides evidence that you were able to do business, i.e. you were not imprisoned, you didn't have to change your name, and you were doing business under your own name instead of someone else managing your life.
Credit history is used to asses what kind of risk you are, and if an entity decides to loan you money.
If you own many credit cards and a mortgage, and never missed a payment, companies will be happy to give you more credit, because you proved that you manage, and pay back your debts on time.
If you have a negative mark, missed mortgage payment or missed credit card payment, companies will tend to reject credit because you pose a higher risk that you have financial problems.
They can also see how many times you had credit searches done, the more searches you that are done against you also increases the risk factor, because it means you might be applying for several loans at the same time to cover other debts.
If you file for bankruptcy, you can wipe your hands clear of debt, but this causes big costs for companies who will fight to claim ownership on assets you owned, so they they repay your loan and pay of legal costs. Basically, they want to avoid this because they want to make money from you easier instead of going into long and costly legal battles.
After bankruptcy you are, basically stuffed. Getting a loan of any kind is almost impossible.
Another factor--one's credit rating is unfortunately sometimes used as an indication of how careful and reliable you are.
Thus, for example, someone with a poor credit rating very well might pay more for insurance than someone with a good credit rating. It can even matter in terms of getting a job.
One's credit history is now big business in the U.S. and it is getting increasingly difficult for the average consumer to keep one's "file" free of outdated, incorrect or misleading information. With companies of all stripes getting into the fray what was at one time a process that existed largely without the consumer's knowledge or particular interest is now a complicated process that can be full of danger (credit-wise) for the modern consumer of credit: one who owns a mortgage or two (a home equity credit line or a second vacation home), several credit and debit cards and a few financed automobiles in their three-car garage. It is no longer the good old days when we "slept" while the compilation of one's credit history was getting done with little notice and by only a few major highly-regarded companies working under the watchful eye of FCC and other arms of the federal government. Your credit history was distilled down ultimately to a three-digit-number and mostly it was this number that was utilized by the large mortgage companies in order to approve mortgages and to determine the interest rate for that mortgage. A higher number brought a lower interest rate. (This part is still true). But along with the growth of big banks and later brokerage houses (and other major players) into the home mortgage business, as the climate grew in certain quarters for continued and additional deregulation of the banking industry, becoming the law of the land, the result being competing for the consumer's mortgage business became the newest game in town, as well as the source of billions of dollars of easy profit for these companies. With it came the responsibility for the consumer to make sure that the only information in his file is truly his information. To erase an error from one's file, a file that is controlled by usually one of the three major credit reporting bureaus, is a time-consuming, Kafka-esque process that pits a single consumer against the secretive powers of the credit bureau, and in its way is an example of being forced to "prove a negative." I have tried unsuccessfully to have major derogatory information removed from my credit history (a married woman has a separate history, plus a history with a spouse with which to contend); what finally worked in my favor was the concurrent passage of time. Because all elements in a credit history are ruled by the period of time it is slated to remain in one's history/report, one can reach the seven-year mark, or a two-year anniversary (for requests for credit histories from outside sources) for example, at which time the questionable information is deleted from the history. With this growth in the credit rating industry one hopes for a growth in the watchful eyes of those whose job it is to keep these bureaus and this frightful industry in line.
