Payment history: The most important component of creditworthiness


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Paying back your credit card and loan balances on time is the most important factor in your creditworthiness.

Your payment history has many complex components that can confuse consumers. However, experts say that ultimately it boils down to not missing a payment and keeping your FICO score in good shape.

The primary goal of a credit score is to show lenders the likelihood of you paying back your debts. While there are many other types of credit scores, FICO is by far the one that lenders most commonly use to make credit decisions. The higher your score, the more likely you are for a lower interest rate and high credit limit. A good credit rating can also help you qualify for the best insurance plans, auto loans, home rentals, and mortgages.

See related: I signed up for Experian Boost: this is what happened

To calculate this score, FICO considers five factors:

  1. How you handled the credit (also called payment history).
  2. Credit utilization.
  3. How long do you have credit.
  4. How much new loan you have.
  5. What Loan types you have.

They are all weighted differently in the calculation, with the payment history having the most weight with 35% of your score.

Although FICO keeps much of the inner workings of its scoring model secret, FICO website discloses openly the many components that make up a borrower’s payment history. These components include everything from information about loan accounts that are paid on time to accounts that have become overdue in public records, such as bankruptcies and judgments.

That may sound like a lot to understand, but it is not, say experts.

“The lack of a payment method can have a negative impact on your creditworthiness and create a potential risk for lenders – whether through a credit card or a loan,” said Heather Battison, former Vice President of TransUnion. “Therefore it is imperative to pay the debts on time and in full every month.”

An important factor

FICO’s scoring system rates borrowers in a range of 300 to 850. If you’re looking to improve your score, focusing on payment history is a good place to start.

Within the FICO standard scoring formula, payment history accounts for 35% of the borrower FICO result. (The second most weighted factor – amounts owed – makes up 30% of an FICO score.) Although FICO has a slightly different scoring model for Equifax, Experian, and TransUnion – the three major US credit bureaus who manage consumer credit reports – this percentage of payment history is the same for each bureau’s FICO scoring model.

The scoring model creator says there is a good reason for this.

“FICO research has shown that a person’s balance of payments tends to be the strongest predictor of the person’s likelihood of paying all debts as agreed in the future,” said Barry Paperno, a credit rating expert who worked for FICO and Experian.

In other words, FICO found that if you’ve been good with credit in the past, you will continue to do so.

Payment history components
What goes into your payment history? The data can be divided into seven components:
  1. Payment information on various types of accounts, including credit cards, retail accounts, installment loans, and mortgages.
  2. The appearance of adverse public records such as bankruptcies, judgments, lawsuits, and liens, as well as debt collection items and violations. However, some liens and almost all civil law judgments are no longer included Consumer credit reports according to new rules that came into force in July 2017.
  3. How long are overdue payments.
  4. The amount of money still owed on accounts in arrears or debt collection items.
  5. How much time has passed since violations, adverse public records, or collection items.
  6. The number of overdue items listed on a credit report.
  7. How many accounts are paid as agreed.

Payment history and negative credit information

Easy right? Not as much. The FICO score depends on the information in the borrowers. Credit reportsthat is provided by creditors. And not all believers behave alike. For example, many creditors only report defaults if they are at least 60 days late. Others can wait even longer if they even get in touch.

How long these blemishes stay on your credit report can also vary: negative items typically stay on a credit report for seven years, but can stay on for up to 10 years with certain bankruptcies. In the meantime, you can expect on-time payments, but payment information from other companies such as utilities, renters, and landlords won’t necessarily appear on credit reports or on your FICO score. Positive information will remain on your credit reports for 10 years.

See related: 18 things that can hurt your creditworthiness, 16 things that won’t hurt your creditworthiness

Authorized users and payment history

If you are one authorized user on someone’s credit card, it can get tricky. While payment history for a shared account can affect an authorized user’s FICO score, one of the offices (Experian) only contains positive information about the authorized user’s credit report, while the other two offices contain both positive and negative data. Authorized users are not legally responsible for funds in the owner’s account. You can even remove part of your history if something goes wrong with the authorized account – all you have to do is ask to be removed from the card account and that card’s history will disappear from your payment history.

Account holders and co-signers do not have this luxury.

“With both co-signers responsible for the accumulated debt, a co-signed credit card can have a negative impact if one signer is late or missed payments altogether,” Battison said.

Tips for a good credit rating

  • Building a strong payment history is not just about what you’re doing right, it’s also about what you’re doing wrong.
  • To get a good score, you need to make consistent, on-time payments while avoiding them Mistakes That Will Cost You FICO Points.
  • What if you screw up your credit? For example, expect a 30-day late credit card or loan payment to lower your FICO score by up to 110 points.
  • Errors can take years to go away. For this reason, it is very important to be careful with your payment history.

“Compared to all other types of credit report information evaluated by the FICO scoring formula, payment history can always be expected to have the greatest impact, both positively and negatively, on an individual’s FICO score,” says Paperno.

Editorial disclaimer

The editorial content of this page is based solely on the objective assessment of our authors and is not driven by advertising money. It was not provided or commissioned by the credit card issuers. However, we may receive compensation if you click on links to our partners’ products.

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