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How does payment history affect your credit score?

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Paying your bills on time, every time, is the best thing you can do for your credit score and your overall financial health. Your payment history gives lenders insight into what kind of borrower you are. Do you always pay on time or do you miss payments often? If it’s the latter, you’re deemed a high risk.

Payment history is so important, it accounts for 35 percent of your overall credit score. It’s the single most important factor behind your score.

Let’s dig into how payment history factors into your score and what you can do about it.

What does your payment history include?

Accounts that show up on your credit report are largely credit-related—credit cards, mortgages, car payments and other installment loans. These are the accounts that are reported regularly. This means your on-time payments are reported, as well as late payments.

There are other accounts on which you may owe money, but these are from businesses that don’t see themselves as extending credit. Things like utility payments are not normally reported to the credit bureaus.

Here is what the FICO scoring model considers when calculating a borrower’s payment history:

  • Payment information on individual accounts, including credit cards, loans, mortgages and retail accounts
  • How far overdue delinquent payments are currently, or were in the past
  • Amount of money still owed on delinquent accounts, including those that have been sent to collections
  • Number of past due payments on a credit report
  • Length of time that’s passed since each delinquency, adverse public record or collection item was added to your report
  • Number of accounts that are being paid as agreed

How does payment history impact your credit score?

The overall impact of late payments depends on a few factors, including how often you pay late, and how severe or recent it is. If you miss your deadline by a few days—actually up to 29 days — and pay the amount due, nothing will be reflected on your credit report. This does not mean you’ll be off the hook on paying a late payment fee to your creditor, though. Those usually kick in after a payment is one day late.

But missed payments are not reported to the credit bureaus until they’re at least 30 days late. Multiple late payments will seriously damage your score. Remember that in the FICO model, payment history makes up a whopping 35 percent of the total.

If you see a late payment fee for just a few days past due and you’re a good customer, you can call customer service and ask them to waive the fee. Most will waive it for a good customer.

How a delinquency will affect your score also depends on a few factors. These include the severity of the delinquency (90 days is much worse than 30 days, for instance), as well as how much positive data you have in your credit report (thin files are hit harder) and your credit score.

There are two categories of consumers likely to see a more serious drop in their score over a late payment—those with excellent credit and those with poor credit or thin credit files. The same applies to the amount of damage done by collections, as noted above.

How long negative payment history impacts your credit score

Negative information in your payment history can have lingering effects for years. For example, late payments can stay on your credit report for as long as seven years. This is the case for foreclosures and any accounts that are sent to collections. Bankruptcies, lawsuits or other judgments can stay on your credit report for even longer.

Tips on improving your payment history

It is far easier and faster to bring a score down than to bring it up. One mistake can have serious and somewhat immediate consequences. Recovering from those consequences won’t happen overnight once you pay the bill. It will take a few months of on-time payments to see a substantial improvement.

For this reason, you will need to do whatever it takes to set things right during this time. Consider the following tips when looking at ways to improve your payment history:

  • Always pay your bills on time. Paying your bills on time and watching your credit utilization is the best way to improve your credit score (or maintain a solid credit score). Credit utilization—how much of your total credit you have accessed—counts for 30 percent of your FICO score. Keeping that number below 30 percent is best, but you should know that people with the very best scores usually have utilization ratios in the single digits.
  • Limit credit inquiries. Try not to apply for new lines of credit while you’re waiting for your score to bounce back. Hard inquiries will bring your score down in the short term. Don’t close any accounts without a very good reason, because that, too, will affect your overall score.
  • Get current on any missed payments. If you’ve made a few late payments but you haven’t taken the steps to get current on a credit account, now is the time to catch up.
  • Communicate with your lenders. If you’re worried about missing a payment or struggling to pay off debt, let your lender know. Tell them you need to adjust your payment schedule or discuss a lower interest rate. There is no guarantee they will be able to do so, but some lenders may be willing to work with you.

The bottom line

After missing a payment, give yourself at least six months to recover—but keep an eye on your score in the meantime. You are not guaranteed a perfect credit score simply because you have a strong history of on-time payments. Regardless, your payment history is one piece of vital information used to determine your FICO scores—you can move forward from a late payment or other credit miscue with patience and time.