Credit Lessons – What to Know About Payment History

Your credit score matters a great deal when it comes to car loans, credit cards, mortgages, and even some jobs. In general, you want to keep your credit score as high as possible, but that can be tricky if you’re not sure how the credit process works. 

Your credit score is determined by multiple factors including your credit history, payment history, your credit mix, and how much is outstanding on all your accounts, or your credit utilization. Of these factors, your payment history is the most heavily weighted, which arguably makes it the most important. 

While we often talk about a single credit score, you actually have three. There are three big credit bureaus who generate your credit score: Experian, Equifax, and Transunion. While their algorithms are slightly different, payment history is central in all. In most cases, payment history accounts for 35% of your total credit score. 

The Basics of Payment History

Your credit score hinges on how well you’ve paid off previous loans in the past. When you take on new debt, like a mortgage, car loan, or a personal installment loan to buy furniture, a vacation, appliances, or to pay off debt, that new loan and debt is recorded by the credit bureaus. As you make timely payments on those installment loans, the credit bureaus record that you made the payments.

Not all payments are weighted equally, however. A personal installment loan has set monthly payments, but that isn’t the case for credit cards or other lines of credit. Making the minimum payment on all your credit cards while maintaining high balances is good but paying down those balances is far better. The more you pay every month on your credit cards, the more the credit bureaus reward that behavior in terms of your credit score.

Paying Down Debt, On Time

Minimum payments on revolving credit like credit cards are designed to keep most of your credit card balance intact, especially if you’re still using the credit card for new purchases. That is why paying down debt is so heavily rewarded by your credit history. Making on time payments every month is critical but paying down debt while you make those payments is exceptional.

Pay as much as you can every month, on time, for your credit cards. Ideally you should be paying the entire balance off every month, but that isn’t always feasible. The more debt you pay off, the higher your credit score will be.

Tips for Making Timely Payments

On-time payments are the backbone of your credit score. You can’t afford to miss any payments, as there are long-term consequences, so you’ll want to use good strategies to stay on top of your loan obligations.

Move Due Dates as Needed

Most banks are willing to move due dates around a bit if you need to ensure they get paid in a timely manner. If you have a payment due before your paycheck comes in every month, call the bank, and see about moving the due date forward a bit so that you can get it paid on time every month.

Set Up Automatic Bill Pay

There is nothing better than automation when it comes to paying bills. Your paycheck comes in, your bill payments go out like clockwork. Take advantage of the bill pay services offered by your bank so that your bills are always ready to go on time, and you don’t have to remember to pay them or write any checks.

Use Your Calendar App

If you have payments that need to be made that don’t necessarily work with automatic bill pay, use your phone to help you remember to get them paid on time. You can easily set up reminders in your phone and add the payments to your calendar in your phone so that the payments you need to make never fall off your financial radar. 

Consolidate Loans

If you have what feels like too many bills to keep track of every month, make your life easier by consolidating those loans. A personal loan can be used to pay off multiple smaller loans. Then you have a single installment loan to pay every month instead of multiple small credit cards. The bonus here is that you will likely pay less every month than the combined minimum payments and you may pay off the loan more quickly. 

RELATED: How to Get a Loan with Bad Credit

Missed Payments and Your Credit Score

One of the worst things you can do is miss a debt payment. The only thing worse than missed payments is not paying the debt at all when it comes to your credit score. When you miss a debt payment, you can expect the following impacts to your credit score:

  • Your missed payment will be recorded in your credit report.
  • The missed payment will remain in your credit report for XX years.
  • Your credit score will take an immediate, sizeable hit.
  • Your credit score may remain significantly lower for years.

The good news is that the credit bureaus appreciate the need for some flexibility. The significant penalties for late payments don’t start until thirty days after the payment is due. That doesn’t mean you should pay your bills a month late, of course. It just means you have a bit of grace if there is a delay in the mail or you miss the first payment of a new account because you forgot to add it to your online bill pay. 

RELATED: What to Do When Your Loan Is Not Approved

If you do make a mistake or you’ve made a mistake in the past, you already know the consequences first-hand. Fortunately, all is not lost, as your credit score is regenerated every month. As you make new payments on time and work on paying down your debt with large, timely payments, your credit score should continue to rise. 

You can even help it rise faster by taking on new debt to consolidate your old credit cards and pay them off more quickly. If you’re struggling with your credit score currently, a bad credit loan can help make consolidation possible. As your credit score rises with your diligent payment history, you will have an easier time being approved for future loans as well. 

RELATED: Why You Need an Emergency Fund and How to Start