How does payment history affect your credit score?

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As my readers know, I am all about paying your bills on time all the time. Doing so is what is best for your credit score and your overall financial health, plus it is just the right thing to do. Let’s dig into how payment history factors into your credit score and see if we can shed some light on why that is so.

What accounts affect your payment history?

The accounts that show up on your credit report are largely credit related accounts, like credit cards, mortgages, car payments and other installment-type loans. These are the accounts that are reported regularly for the most part; this means that your on-time payments are reported as well as late payments.

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

This can be both a good and bad thing. Good because while if you are late on your electric bill and you might have to pay a reconnection fee, it won’t be reported to the credit bureaus. Bad because paying that bill on time every month will not be reported either. (This is changing with the advent of some new products on the market that will give you points for these positive payments. Right now, products like Experian Boost or UltraFICO—which is still in its pilot phase—will only impact your Experian score.)

Similarly, when you go to the doctors for an ache or pain, the office staff does not pull a credit report on you to decide if they will let you see the doctor or nurse. They are not extending you credit even though you may leave the office with a bill unpaid. They see themselves as delivering a service, not lending money. Hence no report pulling or credit reporting. This is true for both utilities and medical bills, as long as things go according to plan!

How collection items affect your score

However, if you should become delinquent paying any of your bills and a collector is needed, then the account—whether it is utility or medical or whatever—will likely be reported. Collection accounts do appear on your credit report and they will negatively impact your score. A single collection could bring your score down 100 points or more, depending on the circumstances.

Before we move on, there is another feature of medical debt I’d like to talk about as it relates to your credit report. Medical debt is generally not reported to the credit bureaus unless it becomes delinquent and is sent to collections. The big three credit bureaus—Equifax, Experian and TransUnion—have instituted a 180-day waiting period before medical debt is added to your file. This six-month period was established to give consumers time to correct billing errors, work with their insurance company to cover more of the costs or come up with a payment plan to pay off the debt.

Another medical bill anomaly stems from the fact that few of us go looking for an illness or condition that requires medical attention. So, once you pay off a medical debt, even if it is a charge off, it may show on your credit report, but it doesn’t count in your score any longer.

What happens if you miss a credit card payment?

It depends on when you miss it. If you miss it 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 that you may not have to pay a late payment to your creditor. Those kick in at just one day late usually.

But missed payments are not reported to the credit bureaus until they are at least 30 days late. If you see a late payment fee for just a few days past due and you are a good customer, I suggest you call customer service and ask them to waive the fee. Most will for a good customer.

As for how a delinquency will affect your score, this 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 where you are on the credit score scale. There are two categories of consumers for whom late payments are 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.

While it seems obvious, it does bear repeating: multiple late payments will seriously damage your score. Remember that in the FICO model, payment history makes up a whopping 35% of the total. It is also “extremely influential” in the VantageScore model.

How long does it take to improve after a missed payment?

It is far easier and faster to bring a score down than it is to bring it up. One mistake, as we have seen, 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. And know that if you lose 100 or more points due to a mistake like this, getting all of those points back will take several months.

For this reason, you will need to do whatever it takes to do all the right things during this time. This means of course, paying your bills on time and watching your credit utilization. Credit utilization—how much of your total credit you have accessed—counts for 30 percent of your FICO score. Keeping that number below 25% is best, but you should know that people with the very best scores usually have utilization ratios in the single digits. VantageScore 4.0 counts utilization as “Extremely Influential,” making it the top factor.

Try not to apply for new credit while you are waiting for your score to bounce back. Hard inquiries will bring your score down in the short term. Don’t close any accounts without very good reason, because that, too, will affect your overall score.

My advice is to give yourself at least six months to recover, but keep an eye on your score in the meantime. Just don’t obsess over it—what’s done is done and you can only move forward from a late payment or other credit miscue with patience and time.

Good luck!

Have a credit score question for Steve? Drop him a line at the Ask Bankrate Experts page.