You likely know that your credit score is an important factor when it comes to making big financial decisions – getting a car, obtaining credit cards, buying a house, etc. With five parts (new credit, types of credit, credit history, inquiries, and payment history) factoring in on your score, it’s easy to get lost when you make choices about your financial health. As the biggest contributor to your credit score, payment history is the place to start when trying to build, or rebuild, your credit.
Making up about 35% of your entire credit score, payment history has the biggest impact on your final score. Payment history is exactly what it sounds like: a history of payments you have made. This record of your payments keeps track of which payments have been on-time, late, or completed missed on your credit accounts. This is super important to any potential lenders or creditors because it tells them the likelihood of you paying your debts on time or if you’re at risk of going into default (paying late or not paying at all).
These accounts are looked at when determining your payment history score. Those who make on-time payments every single month on these accounts will have a great payment history score. However, if you make late payments or are unable to make any payments at all, these can severely damage your payment history.
So, what doesn’t affect your payment history? Bills, mostly. Things that you are not “paying off” (like a car, a phone, or a credit card), do not count against or towards you on your payment history – to a point. These are things like your utility bills, your rent, and your internet fee. However, just because these monthly payments do not count, overall, to your payment history, they can still affect your score. For example, if you are very late on rent payments, your landlord may hand your account over to a collection agency. At that point, you are damaging your payment history.
It’s a good idea to remain friendly with your landlord, utility companies, and any other institutions your work with. That way, if you come into difficult times, they are more willing to work with you towards a solution that won’t affect your credit score.
The payment history portion of your credit score is based on several components. Each of these has varying levels of importance, and some are weighed more heavily than others. Overall, all of them have your payment behavior in common.
Because the payment history potion of your credit score is the largest, late payments and delinquent accounts are very detrimental to your score. The longer these payments remain unpaid, the lower your score will become.
Additionally, poor scores based on late payments are not immediately erased once you pay your bills. Unfortunately, time is a major factor. It can take up to 10 years to regain a high score in this area.
Prevention is the best option for keeping a high score in your payment history. You can prevent late payments with responsible spending, making a budget, paying bills on time, and staying (or getting) current on missed payments.
If you know you aren’t going to make a payment on time, call ahead. Making a partial payment or arranging a timeline is a measure of good faith. This may indicate to the creditor that you are trying to repay your debts, and they may extend their grace period. This means your account will not go into delinquency right away, and gives you more time to make payments.
If you do have late payments and delinquencies on record, however, there are a couple of things you can do.
Just remember, even though your payment history is a big part of your credit score, time is on your side. Pay late payments as soon as you can and eventually, your credit score will be in tip-top shape!
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