Payment history: The most important credit score component

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

By  and   |  Updated: October 12, 2017

How your FICO credit score is calculated: Payment history

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

Your payment history comprises many complex components, which can confuse consumers. But experts say that ultimately, it boils down to never missing a payment, and your FICO score will remain in good shape.

The primary objective of a credit score is to illustrate to lenders just how likely you are to repay your debts. 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 qualify for a lower interest rate and a high credit limit. A high credit score can also help you qualify for the best insurance rates, car loans, home leases and mortgages.

To calculate that score, FICO considers five factors:

  1. How you’ve handled credit (otherwise known as your payment history).
  2. Credit utilization.
  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 at 35 percent of your score.

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.

“Missing any form of payment can have a negative impact on your credit score and can pose a potential risk to lenders — whether it be from a credit card or a loan,” said Heather Battison, vice president at TransUnion. “That is why it is imperative to pay off debts on time and in full each month.”

"Missing any form of payment can have a negative impact on your credit score and can pose a potential risk to lenders – whether it be from a credit card or a loan."

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,” said Barry Paperno, a credit scoring expert who has worked for FICO and Experian.

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

What goes into your payment history? The data can be broken down into seven components:

  1. Payment information on various types of accounts, including credit cards, retail accounts, installment loans and mortgages.
  2. The appearance of any adverse public records, such as bankruptcies, judgments, suits and liens, as well as collection items and delinquencies. However, some liens and nearly all civil judgments are no longer included in consumers' credit reports under new rules that took effect in July 2017.
  3. How long overdue any delinquent payments have become.
  4. The amount of money still owed on delinquent accounts or collection items.
  5. How much time has passed since any delinquencies, adverse public records or collection items.
  6. The number of past due items listed on a credit report.
  7. How many accounts are being paid as agreed.
PAYMENT HISTORY COMPONENTS

What goes into your payment history? The data can be broken down into seven components:

  1. Payment information on various types of accounts, including credit cards, retail accounts, installment loans and mortgages.
  2. The appearance of any adverse public records, such as bankruptcies, judgments, suits and liens, as well as collection items and delinquencies. However, some liens and nearly all civil judgments are no longer included in consumers' credit reports under new rules that took effect in July 2017.
  3. How long overdue any delinquent payments have become.
  4. The amount of money still owed on delinquent accounts or collection items.
  5. How much time has passed since any delinquencies, adverse public records or collection items.
  6. The number of past due items listed on a credit report.
  7. 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 60 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 certain bankruptcies. Meanwhile, you can expect on-time payments to appear, but payment information from other businesses, such as utility companies, renters and landlords, isn’t necessarily listed on credit reports or included in your FICO score. Positive information remains on your credit reports for 10 years.

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. Authorized users are not legally responsible for any balances on the owner’s account. They can even remove part of their histories if things go wrong with the authorized account — all they have to do is ask to be removed from the card account, and that card’s history will vanish from their payment history.

Account holders and co-signers don’t have that luxury.

“Since both co-signers are responsible for the accumulated debt, a co-signed credit card can have negative implications if one signer makes late payments or misses them altogether,” Battison said.

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 credit card or loan payment, for example, to drop your FICO score by as much as 110 points.

Mistakes can take years before they disappear entirely. 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: 18 things that hurt your credit score, 16 things that don't hurt your credit score  


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Updated: 10-22-2017

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