Your credit score can feel like one of the most important things in life, namely if you’re trying to get approved for a loan, negotiate a better interest rate, or buy a house. While your credit score does not define you as a person, a good one can make life a whole lot easier while a bad one can negatively impact more than just your bank account. Manipulating your credit score is a bit like a puzzle made up of many moving parts. One area that you do not want to shy away from: payment history. So how (and why) exactly does payment history affect your credit score?
What Is Payment History?
Your payment history indicates to credit card companies and other lenders how reliable you have been with repaying debts and balances over the course of your credit history. There are several pieces of data that play into your payment history, including whether you make payments on time, how many late payments you’ve had, and how late those payments have been. All of this information can be found in your credit reports, which are compiled by credit bureaus Equifax, Experian, and TransUnion.
Payment history is the single largest factor of your credit score. For one of the most commonly used credit scoring models, FICO, payment history makes up 35% of your score. Another common model, VantageScore, calls payment history “extremely influential.” Payment history plays so heavily into your credit score because lenders want to know first and foremost whether you’ll be able to repay your debts when considering you for a loan.
The more often that you make on-time payments, the less risk you are to lenders; the more often that you miss payments, the riskier you are and the harder it might be for you to get a loan.
What Is Included in Payment History?
According to FICO, there are a number of account types that end up on your credit report, including:
- Credit cards
- Mortgage and installment loans (e.g. auto loans, personal loans)
- Retail and finance company accounts
Your recurring essential bills — such as utilities, phone, and cable — are not traditionally included in your credit report unless the biller is certified to report your payments to credit bureaus. However, if you have a number of missed payments, your biller is able to report the delinquencies to a collection agency, which appears on your credit report and affects your credit score.
Significant information on your credit report that factors into your credit score includes:
- If you pay bills on time or late
- How much money you owe on delinquent accounts
- How long past due your payment are or were (typically in increments of 30 days)
- How recent your past due payments were
- Bankruptcies, accounts with collections, and lawsuits pertaining to credit accounts
How Does Payment History Affect Your Credit Score?
As a rule of thumb: A good payment history means a higher credit score, and a bad payment history means a lower credit score. Because payment history is the largest slice in your credit score pie, any drastic changes to how you do (or don’t) pay your bills can cause your score to fluctuate.
Bad marks don’t tend to hit your credit report until a payment is at least 30 days past due. If you miss a credit card payment, your credit card company might issue you a late fee, but there is a slight grace period to settle up the payment before the credit bureaus hear about it.
Once the delinquency hits your credit report, it can start to affect your credit score. One late payment will not cause your credit score to plummet. Credit scoring agencies pay attention to consistency, so if you’re consistently making on-time payments and miss only one payment, it may cause your score to dip, but it won’t be the end of the world. If you consistently miss payments, though, it may be more difficult to bounce back.
How to Improve Your Payment History
Working toward a better payment history is one of the most effective ways to see a bump in your credit score.
Make at least the minimum payment by your due date
Some consumers get caught up thinking that the only way to avoid a missed payment is to settle your balance. In actuality, you only need to make the minimum payment by or before your due date. When it comes to credit card payments, making only the minimum payment can make it difficult to chip away at debt, but it outweighs the consequences of a late or missed payment.
If you struggle to make minimum payments, consider setting up automatic payments, payment reminders, or restructuring your budget to better incorporate your necessary expenses. You can also lower your credit limit so you are not tempted to spend more money than you are able to afford.
Talk to your biller, service provider, or lender
When all else fails, communication is key. Contact your biller, service provider, or lender if you are experiencing financial hardship or are unable to make a payment for some other reason. They may be able to help you work out a payment plan that is mutually beneficial. It is far easier to avoid negative marks on your credit report before they happen than to try to get them fixed after the fact.
Pay up and focus on future payments
First thing’s first: Try to settle any delinquent payments as quickly as possible. The longer that you go without paying at least the minimum amount, the more damage that it can do to your score.
Unless a late payment or delinquent account has been added to your credit report by mistake, it can be difficult to get these negative marks removed. Late payments and other penalties can last on your credit report and affect your credit score for up to seven years. While this is quite a bit of time, it’s worth noting that older information counts less toward your credit score than newer information. Sometimes, it’s better to let old marks go and focus your energy on future payments.
