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How Your Payment History Affects Your Credit Score

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If you do just one thing to improve your credit score, it should be paying your bills on time. Of the five factors that make up your credit score, payment history is the biggest piece of the pie at 35%.

“Lenders and creditors want to know they’re going to get their money back,” said Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “How you pay your bills is the best way for them to judge that.”

Your payment history includes your credit card accounts, auto loans and mortgages, and payments more than 30 days late can stay on your credit report for up to seven years, so you don’t want to take your payment history lightly. Here’s a closer look at how your payment history helps determine your credit score.

What factors affect your credit score?

Your credit score is a three-digit number that helps lenders and creditors decide whether to lend you money and at what interest rate. The most popular credit score among lenders is the FICO Score, which ranges from 300 to 850. A score between 300 and 579 is considered poor, 580 to 669 is fair, 670 to 739 is good, 740 to 799 is very good and 800 to 850 is exceptional. Scores are based on five factors:

  • Payment history (35%) — This is a record of how you pay your bills. How badly late payments hurt your score will depend on how many you have, how big the payments were and how long ago they happened.
  • Amounts owed (30%) — A major part of this is your credit utilization ratio, or the amount you owe relative to your overall credit limit. If you use too much of your available credit, that can hurt your score. A standard recommendation is not to use more than 30% of your combined available credit. McClary went even further and suggested not using more than 20%. “The closer you get to your credit limit, the more risk you run of having a negative impact on your credit score,” he said.
  • Length of credit history (15%) — This factors in the age of accounts on your credit report and how long it’s been since you’ve used the accounts. Usually, a longer credit history means a higher score.
  • Credit mix (10%) — This considers what kinds of debt you have such as credit cards, retail store cards, installment loans and mortgages. Having a good mixture (like credit cards and a mortgage) can help your score, although you don’t need one of every credit type.
  • New credit (10%) — If you open too many new credit accounts in a short period, your score could suffer.

The FICO Score isn’t the only credit score in town. The three major credit reporting bureaus — Equifax, Experian and TransUnion — also have their own credit-scoring model called VantageScore.This score is based on payment history, credit utilization, type and duration of credit, total balances/debt, available credit and recent credit behavior and inquiries. Like with FICO Scores, payment history carries the most weight. VantageScores range from 300 to 850. A score under 550 is considered very poor, between 550 and 649 is poor, 650 to 699 is fair, 700 to 749 is good and 750 and above is excellent.

What types of information are included in your payment history?

Now that you know what your payment history is, and the other factors that make up your credit score, let’s talk about what actually goes into your payment history. Common types of payments on credit reports include:

  • Credit cards
  • Retail accounts
  • Installment loans
  • Finance company accounts
  • Mortgages

Your credit report also reflects negative items related to those accounts like late payments and delinquencies. Bankruptcies appear in the public records/collections area of your credit report.

How long can negative payment information affect your credit score?

Most negative payment information stays on your credit report for seven to 10 years, depending on the type. The older the debt gets, the smaller the effect on your score.

A late payment won’t show up on your credit report until it’s 30 days overdue. So if you’ve missed a deadline, do your best to pay before those 30 days are up. If you go past 30 days, the late payment can be reported to the credit bureaus and stay on your report for seven years, even if you pay what you owe. The biggest score drop will happen to people with good credit who have never had a late payment before, McClary said.

But if that missed payment is an anomaly, and you make your payments on time from there on out, your credit score will gradually rebound.

Things get more serious if you go beyond 30 days overdue. Your late payment will keep being reported to the credit bureaus up until the point (usually 180 days) when the creditor closes the account and reports it as a charge-off. They’re writing the debt off as a loss, but you still owe it. At that point, the creditor might turn your debt over to a third-party debt collector or even sue you. You can still pay off the debt, but it will stay on your credit report as a paid charge-off for seven years from the original delinquency date.

A Chapter 13 bankruptcy stays on your credit report for seven years, and a Chapter 7 bankruptcy stays on your report for 10 years. Repossessions and foreclosures also stay on your report for seven years.

The good news is, positive information sticks around for a long time, too. An account in good standing stays on your report for as long as it’s open and being reported. A closed account in good standing stays on your report for 10 years.

Do more recent late payments count more than older ones?

The simple answer is, yes. The older a negative payment, the better. If you missed a payment or two several years ago, and none since, the effect on your credit score will lessen. That’s because your more recent behavior shows that you’re paying your bills on time.

But if your report has several missed payments, including ones in the last two years, “that’s a more recent sign of risky borrowing behavior,” McClary said.

How can you improve your payment history?

The best thing you can do to improve your payment history is simply to pay your bills on time. As negative items fall off your credit report, your score also will continue to improve.

Paying off outstanding debts and stacking up months worth of on-time payments will help improve your credit score, McClary said, because it will show a recent pattern of positive behavior.

If you do miss a payment, try to pay it before it’s 30 days late to prevent it from going on your credit report. If you can’t do that, do your best to avoid an account being charged off or going into debt collection.

If you’re having a hard time staying current on your bills, reach out to your creditors. They could be willing to put you on a repayment plan. You might also consider debt consolidation (rolling all your debts into one lower-interest loan) or a debt management plan (working with a credit counseling agency to negotiate lower interest rates or fees from your creditors).

You can also take less drastic steps like setting up autopay and payment reminders and stashing money away in an emergency fund in case you find yourself coming up short on a debt payment.

The bottom line

Paying your bills on time is crucial to maintaining a healthy credit score. One or two late payments won’t hurt you forever, but your credit report has a long memory. And you don’t want late payments to snowball.

“It’s vital that you don’t fall behind on payments, so don’t overextend yourself, debt-wise,” McClary said.


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