How Does Payment History Affect Your Credit Score?

Your credit health is a vital component of your financial future. Strong credit can help you qualify for loans with low interest rates, while conversely, poor credit could become a barrier that stops you from getting the loan you need to buy a home, finding financing to purchase a car, or qualifying for the credit cards with the best rewards and rates. Properly navigating this credit landscape is a complex process. But you will be able to succeed and accomplish your financial goals once you have a better understanding of how your credit score is calculated. In this article, we run through how your credit score is determined and why payment history is so important.

How is Your Credit Score Determined

Your credit score is simply a three-digit number that sums up the information in your credit report, including your payment history and your credit card balances. Lenders use this metric as a way to determine your credit health, with the score designed to predict the likelihood that you can meet your payment obligations. 

Importantly, you are not assigned just one credit score. We all have multiple credit scores that are slightly different because there are multiple credit bureaus, who each have slightly different scoring methodologies, with the two known scores being a FICO Score and a VantageScore. While each scoring model is slightly different, the key components remain the same. Your credit utilization, age of credit, type of accounts and application history all factor in determining a credit score. 

Why Payment History is So Important

The most important is your payment history, which is a record of on-time, late and missed payments on past and current credit accounts. These accounts can include credit cards, lines of credit, personal loans and mortgages. It shows lenders whether you have been reliable in making consistent and on-time payments. And as a result, this serves as the strongest indicator or whether or not you are likely to pay back your debts in the future. While it is unclear exactly how much payment history contributes to your credit score, as different scoring models like to keep their algorithms secret, FICO does claim that 35% of your FICO Score comes from your payment history.

Most potential creditors or lenders will look at your payment history to see if you have ever missed a payment. Late payments in your financial history can pull down your credit score, but it is important to remember that a payment history that is free of late payments doesn’t guarantee a high score. And neither will a handful of late payments dramatically decrease your score if the rest of your financial history is perfect. Lenders will consider how late your payments were, with the higher the number and the more severe, more negatively impacting your credit score. Furthermore, how recently you have paid late will also be considered. For example, if your late payments are from years back, their impact on your credit score will be much more negligible. Regardless, one or two late payments can significantly hurt your credit score. Paying your bills on time, every time, is the best thing you can do for your credit score. 

Conclusion

Strong credit health will be necessary for you to achieve your financial goals, whether that’s getting a low-interest personal loan to consolidate your credit card debt or buying your first home. In achieving good credit, your payment history is the most important factor. Paying your bills in-full consistently is the best way to build up and maintain your credit score.