How your FICO credit score is calculated: Payment history

Your history is complex and changing, but it's all about paying bills on time

By Jeremy M. Simon

This is the first of a five-part series examining what goes in to creating your FICO credit score -- the three-digit number that helps determine how much you can borrow and on what terms. Each part of the series will take an in-depth look at one of the five basic components of the credit scoring model. Today: payment history. 

In the calculation of your FICO credit score, no factor is more important than your payment history.

That history's comprised of many complex components, which can confuse consumers. But experts say that ultimately, there's one main thing consumers need to know: Always make your payments on time and your FICO score will improve.

The primary objective of a credit score is to illustrate to lenders just how likely you are to repay your debts, and while many other types of credit scores are out there, FICO's is, by far, the one lenders use most to make lending decisions. The higher your score, the more likely you are to get a low interest rate and a high credit limit.

To calculate that score, FICO considers five different factors:

1. How you've handled credit (otherwise known as your payment history).
2. How much you owe.
3. How long you've had credit.
4. How much new credit you have.
5. What types of credit you have.

They're all weighted differently in the calculation, with payment history carrying the most heft.

Although FICO is secretive about many of the inner workings of its scoring model, FICO's website openly lays out the numerous components that make up a borrower's payment history. Those components include everything from information on loan accounts that are being paid on time to accounts that have gone delinquent to any public records, such as bankruptcies and judgments. 

While that may sound like a lot to understand, it's not, experts say.

"It's very simple," says Howard Dvorkin, founder of Consolidated Credit Counseling Services. "Pay your bills on time!"

A weighty factor
FICO's scoring system grades borrowers along a range from 300 to 850. If you're looking to improve your score, focusing on payment history is a smart place to start.

Within the standard FICO scoring formula, payment history accounts for 35 percent of a borrower's FICO score. (The second-most heavily weighted factor -- amounts owed -- accounts for 30 percent of a FICO score.)  Although FICO has a slightly different scoring model for Equifax, Experian and TransUnion -- the three major U.S. credit bureaus which maintain consumers' credit reports -- that payment history percentage is the same for each bureau's FICO scoring model.

The scoring model's creator says there's a good reason for that. "FICO's research has shown that a person's payment track record tends to be the strongest predictor of the likelihood that the individual will pay all debts as agreed in the future," says Barry Paperno, consumer operations manager for the company's myFICO.com website. In other words, FICO has found that if you've handled credit well in the past, you're more likely to do it in the future, too.   

Payment history components
So what goes into your payment history? The data can be broken down into seven components:     

• Payment information on various types of accounts, including credit cards, retail accounts, installment loans and mortgages.
• The appearance of any adverse public records, such as bankruptcies, judgments, suits and liens, as well as collection items and delinquencies.
• How long overdue any delinquent payments have become.
• The amount of money still owed on delinquent accounts or collection items.
• How much time has passed since any delinquencies, adverse public records or collection items.
• The number of past due items listed on a credit report.
• How many accounts are being paid as agreed.

Simple, right? Not so much. The FICO score depends on the information in borrowers' credit reports, which is provided by creditors. And not all creditors behave the same. For example, many creditors don't report missed payments until they become at least 30 days late. Others may wait even longer, if they even report at all.

How long those blemishes remain on your credit report can also vary: Negative items generally stay on a credit report for seven years, but can remain for up to 10 years in the case of bankruptcies. Meanwhile, you can expect on-time credit card payments to appear, but payment information from other businesses, such as utility companies, isn't necessarily listed on credit reports or included in your FICO score.

If you're an authorized user on someone's credit card, things can get tricky, too. While the payment history for a shared account can impact an authorized user's FICO score, one of the bureaus (Experian) only includes positive information on the authorized user's credit report, while the other two bureaus include both positive and negative data. And authorized users can even remove part of their histories if things go wrong with the authorized account -- all they have to do is ask to removed from the card account, and over time, that card's history will vanish from their payment history. Account holders, and even co-signers, don't have that luxury.

Tips for a good credit history
Building a strong payment history is not only about what you do right, but also about what you do wrong. To get a great score, you'll need to make consistent, on-time payments while simultaneously avoiding mistakes that cost you FICO points. What happens if you mess up your credit? Expect a 30-day late mortgage payment, for example, to drop your FICO score by as much as 110 points. After a mortgage delinquency occurs, expect to wait three years before your credit score fully recovers.   

If you have a few accounts that are delinquent, "it's going to hurt you a little," Dvorkin says. "If you've got a lot of delinquents, it's going to hurt you a lot."

Mistakes can take years before they disappear entirely. Typically, negative items, such as missed payments, will remain on your credit reports for up to seven years.   

That's why it's very important to be cautious about your payment history.

"Relative to all other types of credit report information being evaluated by the FICO scoring formula, payment history can always be expected to have the most impact, both positively and negatively, on a person's FICO score," Paperno says.

See related: How a FICO credit score is calculated: How much you owe, How your FICO credit score is calculated: Length of credit history, How your FICO credit score is calculated: New credit, How your FICO credit score is calculated: Types of credit used, 10 things you must know about credit reports, The FICO 5: Breaking down the elements of the FICO score

Updated: June 29, 2011

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