How banks use your credit report

For example, you’ve taken out a loan with Bank A, and they’re partnered with a credit reporting agency. Bank A will report your payment activity with them, and the agency keeps a record of these reports.

When you go to Bank B to open a new credit card, they’ll request a copy of your report from the agency (if Bank B is partnered too) so they can see your past credit and payment history, which will include your loan and payment activity with Bank A. Bank B will then use this information to decide whether to approve you for a credit card or not.

If you’re on time with all your payments and you don’t have too much debt already, great! Bank B will approve you because you’re probably a good credit risk. If you’ve missed many payments or have taken out a lot of loans from different banks, Bank B will be less likely to approve you because you’re probably a bad credit risk.

How can you have a good credit history?

Start building a good credit history early. Having a credit card and making regular payments on it is one of the easiest ways to build your credit history and reassure banks that you’re a good credit risk. Check out starter credit cards and start building your credit history ASAP. But you have to be disciplined and pay it off every month (or at least a huge chunk of it so you lessen the interest you have to pay).

Don’t miss payments. “A good credit history consists of a track record of several years with no missed payments on due date,” Ilagan says. Paying on time is one of the biggest contributors to your credit score. Simply making payments on time will have a good impact on your history.

If you’ve missed payments, get back on track. Sometimes, missing payments is unavoidable. But catch up with payments as soon as you can to lessen the bad effect it has on your credit history. According to Ilagan, if your overdue accounts don’t exceed 30 days, “this is usually interpreted that missed payments were unintentional, forgot the due date or did not receive billing statement on time,” and your credit history will remain good.

Keep debts low. Having a lot of revolving debt reflects badly on your credit history. Reduce your debts, in the Philippines, it’s recommended that you keep your debt-to-credit ratio at 30%. Meaning, if your credit limit is P100, 000, your balance should be P30, 000 or less.

Keep all of the good work up. Having a good credit history isn’t a quick fix. You’ll need to be consistent, and to keep up your good credit behavior over many years.

Start building good credit by choosing the right credit card for you.