Focus On Payment History—It’s The Most Important Credit Factor

Payment history is the record of a borrower’s payments on their credit accounts and other debts. As the most important factor when calculating a consumer’s credit score, payment history accounts for 35% of a FICO Score calculation and is treated as extremely influential under the VantageScore model. A strong payment history can’t guarantee a high credit score, but it is a necessary part of building a healthy credit profile.

Whether you’re struggling to make on-time payments or just lost track of a due date, making late debt payments can hurt your credit score. To help you strengthen this important element of your credit profile, Forbes Advisor shows you how payment history impacts your score and what you can do to improve it.

What Does Your Payment History Include?

When evaluating a borrower’s payment history, the FICO scoring model considers these seven factors:

• Payment information on individual accounts, including but not limited to installment loans, mortgages, credit cards and retail accounts
• How late delinquent payments are currently or were in the past
• Amounts owed on delinquent accounts, including accounts that have been sent to collections
• Number of past due payments on your credit report
• Adverse public records like lawsuits, bankruptcies and wage attachments
• Length of time since each delinquency, collection item or adverse public record was added to your report
• Number of accounts currently in compliance with payment terms

How Payment History Impacts Your Credit Score

Payment history accounts for 35% of what makes up your credit score. And, while payment history includes several individual elements, the extent to which it impacts your credit score depends on the severity of lateness, how recently a late payment was made and how frequently you make late payments.

Notably, late payments legally cannot be reported to credit bureaus until you are at least 30 days past due payment. After a late payment is reported, the later the payment—and the more recent the late payment—the greater the negative impact on your credit score. Consumers who pay all of their bills on time have a strong payment history that’s reflected in their credit scores.

It’s imperative that you consistently make on-time payments because, according to data from FICO, it’s possible for a borrower’s credit score to drop up to 180 points after a late payment. This is especially true for consumers with high credit scores, who are more likely to see a sharp score decrease following late payments. That said, the effect of a missed payment ultimately depends on how late it was and the consumer’s credit history.

How Long Negative Payment History Impacts Your Score

Once reported to the credit bureaus, late bill payments can stay on your credit report for as long as seven years. This is also true of foreclosures and accounts that are sent to collections. If any judgments have been brought against you, they’ll stick around for seven years or until the period to bring a claim against you ends, whichever is longer. Likewise, completed Chapter 13 and Chapter 7 bankruptcies stay on your reports for seven and 10 years, respectively.

In spite of these time restrictions, credit bureaus can keep relevant payment data on file past the seven- or 10-year mark. Agencies can then disclose this information under certain circumstances—like if you apply for over $150,000 of credit or life insurance or seek employment that pays over $75,000 per year.

If you’re building credit for the first time, it can be difficult to overcome the impacts of a short credit history. This means it’s even more crucial to establish a positive payment history early on, so your first seven years of credit aren’t marred by late payments—or worse—accounts that were sent to collections.

Do All Credit Bureaus Get Notified About a Late Payment?

If you make a payment more than 30 days after the due date, the lender will report it to at least one of the three main credit bureaus—Equifax, Experian and TransUnion. That said, not all lenders send late payment information to all three of the credit reporting agencies. As a result, your credit reports may look different from bureau to bureau. Review each of your reports at least once a year to keep an eye out for reporting errors that might be hurting your score.

How to Correct Payment History Errors

If you think there are mistakes on your credit report, you can dispute the error by contacting the relevant credit bureau and the lender that reported the incorrect information.

Start by sending the credit bureau a letter or online request detailing the inaccurate information and requesting a correction. Be sure to include copies of any documents that support your claim, and complete the bureau’s dispute form if necessary. Then, send a letter to the business that supplied the incorrect information—again, detailing the disputed errors and providing evidence that supports your request.

Once you submit a dispute, a credit bureau has 30 days to investigate your claims. Within this time, the bureau also forwards relevant evidence to the reporting creditor and contacts you if it needs additional information and documentation.

Following the investigation, the credit bureau is required to send you the results in writing and, if necessary, take steps to correct the information in your file. Finally, check your credit report to ensure the appropriate updates and corrections are made.

How to Improve Your Payment History

In general, improving your credit score requires improving your payment history. To do so, follow these tips:

• Always pay your bills on time. The number one way to improve your payment history is to always make on-time payments. However, this may seem difficult—especially if you’re juggling a busy schedule and multiple accounts. Stay on top of your debt payments by setting up autopay or calendar reminders. If you struggle to make payments due to a lack of funds, review your spending habits and make a budget to keep unnecessary purchases in check.
• Get and stay current on any missed payments. If you’ve already made late payments—or missed payments entirely—take steps to get current on all of your accounts. Late payments typically stay on a credit report for seven years, but the sooner you get up to date on payments, the sooner the impacts will diminish.
• Follow a debt management plan. If you made late payments in the past and are struggling to improve your credit score, consider following a debt management plan with the help of a nonprofit credit counseling agency. Start by searching for reputable credit counseling organizations through the Financial Counseling Association of America or the National Foundation for Credit Counseling.
• Communicate with your creditors. If you anticipate making a late payment or are otherwise struggling to pay off your debts, contact your creditors and keep the lines of communication open. Not all lenders are willing to do so, but some may adjust your payment schedule, lower your interest rate or otherwise help you get current and pay down accounts.
• Consider a debt consolidation loan. A debt consolidation loan is a personal loan that lets borrowers pay off existing debts with a single loan. While this can’t reverse prior late payments—or prevent future missteps—a debt consolidation loan can streamline your loans and make it easier to stay on top of scheduled payments.