How does your payment history affect your credit score?

Paying off your credit card and loan debt on time is the most important factor in your credit score.

Your payment history is made up of many complex components, but experts say it ultimately comes down to never missing a payment.

The main purpose of a credit score is to show creditors how likely you are to pay off your debts. While there are many other types of credit scores, FICO credit scores are by far the most commonly used by lenders to make lending decisions. The higher your score, the more likely you are to qualify for a lower interest rate and higher credit limit. A high credit score can also help you qualify for the best insurance rates, car loans, rentals, and mortgages.

What is payment history?

Your payment history is the single most important factor in your FICO score, accounting for 35%.

The payment history consists of the following information:

• Payment information for various account types, including credit cards, retail accounts, installment loans, and mortgages.
• Adverse public records such as bankruptcies, judgments, lawsuits and liens, as well as foreclosures and arrears. (Some liens and nearly all civil judgments are no longer included on consumer credit reports under new rules effective July 2017.)
• How late are overdue payments
• Amount of money still owed on past due bills or collectibles
• How much time has passed since any wrongdoing, adverse public records, or collection items
• Number of overdue items listed on the credit report
• How many bills are paid by agreement

How does payment history affect your credit score?

As the biggest component of your credit score, your payment history can have a huge impact on your credit score. Pay your bills in full and on time and your bill will see the benefits. On the other hand, start skipping payments and your account will quickly go the other way.

“Not having any form of payment could negatively impact your credit score and could pose a potential risk to lenders — whether it be a credit card or a loan,” said Heather Battison, a former vice president at TransUnion. “That is why it is extremely important to pay off debts on time and in full every month.”

How long stains remain on your credit report can also vary: negative items usually remain on your credit report for seven years, but can remain for up to 10 years in certain bankruptcies.

Meanwhile, you can expect timely payments to appear on your credit report. Billing information from other businesses, such as utilities, tenants, and landlords, is not necessarily shown on credit reports or included in your FICO score unless you enroll in Experian Boost.

“The FICO study found that a person’s repayment track record is generally the most reliable predictor of the likelihood that a person will pay all debts as agreed in the future,” said Barry Paperno, a credit scoring expert who has worked for FICO and Experian.

In other words, FICO found that if you’ve done well with loans in the past, you’re more likely to do so in the future.

What about payment history for authorized users?

If you’re an authorized user of someone’s credit card, things can get more complicated. While the payment history for a shared account can affect an authorized user’s FICO score, one of the bureaus (Experian) only includes positive information about an authorized user’s credit report, while the other two bureaus include both positive and negative data.

Authorized users are not legally responsible for any balances on the owner’s account. They can even delete part of their history if something goes wrong with an authorized account – all they have to do is ask to be removed from the card account and that card’s history will disappear from their payment history.

How to improve your payment history

Building a solid payment history is not just about doing the right thing, it’s also about what you’re doing wrong. If you don’t have a stellar payment history, there are a few things you can do to get back on track.

Pay off your credit card balance in full every month

While it may seem obvious, the best way to improve your payment history and overall credit score is to pay off your balance monthly. Having a consistent payment history is a great way to improve your credit score and make sure you’re spending within your means.

Try Experian Boost

Experian Boost is a free tool offered by Experian that includes daily timely payments on your credit report. In addition to your credit card statement, your mobile phone bill, streaming services, and general utilities may be counted towards your credit score to improve your payment history.

Check your credit score regularly

You may have been told that checking your credit report can hurt your overall credit score, but this is just a common myth in the credit industry. Checking your credit report regularly does not affect your credit score and can help you stay on top of your finances, so late payments won’t catch you off guard.

Consider a balance transfer card

If you’re stuck in a high-interest credit card debt cycle that’s negatively impacting your payment history, a balance transfer card can help. Balance transfer cards allow you to transfer a balance that is subject to a high interest rate to a new card that offers an initial 0% interest rate. Not compounding can be a good way to start making a dent in your debt by improving your payment history.

bottom line

Your payment history may be just one component of your overall credit score, but deviating from it can seriously affect your creditworthiness and financial health. The key to maintaining a good payment history is to always pay off your balance whenever possible.

If you have already found yourself in a situation where you have a less than satisfactory payment history, you still have options. Start trying to pay off your balance in full every month, and if that’s not an option, consider a balance transfer card to reduce your debt.