Most people know that paying your bills on time can help you avoid interest charges and late fees, but do missed payments really have that big of an impact on credit score?
The answer is yes — payment history, defined as your track record of paying bills, is often the most important factor that is considered when calculating your credit score. In fact, it can account for about 40% of your score when using the VantageScore® model. This is because your payment history tends to be viewed as a strong predictor of your ability to pay off any future loans. If you have a payment history full of missed payments, late payments or defaults, this could decrease your chances of being approved for any new credit cards or installment loans. Some lenders refer to this as your creditworthiness.
While a strong payment history doesn’t guarantee that you’ll have a good credit score, it can influence it if payments are consistently made on time.
In this article we’ll outline what is included in your payment history, how far back in time it goes and some ways to improve it if you’ve struggled in the past.
What does your payment history include?
Your payment history can include a detailed list of past bills and if you did (or did not) pay them. These could include credit card bills, revolving accounts such as home equity loan payments, installment loans such as mortgage or auto loan payments and any kind of in-store financing you have such as payments to a furniture store for a new sofa.
The details of these bills are generally available to credit bureaus. Here are a few things that are usually considered part of your payment history:
- Payment information on each account you have including credit cards, mortgages, auto loans, personal loans and retail or store credit cards
- Amount of outstanding money owed on delinquent accounts, accounts in collections or other negative marks (called derogatory marks)
- How long your delinquent payments have been overdue
- Number of accounts you’ve paid on time
- Unpaid taxes to the IRS
How far back does your payment history go?
Information about your payment history generally remains on your credit report for a set amount of time.
- Two years: Credit checks, such as hard inquiries from credit card applications
- Seven years: Information on late payments, bills sent to collections, foreclosures plus Chapter 13 bankruptcies
- Ten years: Closed accounts in good standing plus any Chapter 7 bankruptcies
- Indefinitely: Open accounts in good standing and tax liens
It’s usually after these time periods have concluded that the payment history will no longer appear on your credit report. And once removed, you may see an impact to your credit score.
How does payment history affect your credit score?
Your payment history captures your ability to pay the amount you owed on your bills and whether they were paid on time. Since lenders highly value on-time payments, failure to make these could affect your ability to obtain credit.
The degree of impact of payment history on your credit score depends on several factors such as how long it’s been since you’ve missed a due date, how frequently you have paid late.
According to a FICO® report, someone with a credit score of 736 could potentially see it drop to as low as 685 if a payment is missed by 30 days (this number would be different depending on your individual credit history).
If you want to help keep your credit score healthy, establish a good and consistent payment history. This means you pay at least your minimum payment on-time every billing cycle.
What are some ways to improve your payment history?
Though you won’t see changes overnight, there are some things you can do to improve your payment history over time. Here are some actions to consider:
- Always pay your bills on time. This is the single best way to maintain a healthy payment history. Even if you haven’t been consistent in the past, you can always start today and show lenders your ability to improve over time.
- Spend within your means. Given your income and cash on hand, try not to make purchases that you’re not able to pay back within the next billing cycle. Your debt-to-income ratio should be less than 40%, if possible.
- Set up auto-pay. Many banks and lenders offer this option. Your payments are automatically deducted from your bank account and sent to the lender on any date you choose. You don’t have to manually pay the bill or remember various due dates.
- Pay any late bills and get current. Square up with all your lenders by getting current on any missed or late payments. You’ll likely face fees and a hit to your credit score, but this might get you back to a clean starting point. From here, you can set your sights on never missing another payment again.
- Request a payment schedule. See if your lender will adjust your payment schedule if you’re struggling. Some lenders may be willing to work with you in hopes of recouping any late or missed payments as soon as possible.
- Consolidate your debt. In some cases, you may be approved for a debt consolidation loan. This could let you combine all your debts into one single loan with one payment per month instead of many.
Payment history is usually the most important factor in the calculation of your credit score. If you fall behind on payments or default completely, those details will probably appear on your credit report and likely translate to a lower credit score for a period of time. In the same way, paying your bills consistently on time can allow you to demonstrate creditworthiness, which can have a positive influence on your credit score.
It takes diligence and vigilance to successfully make all your payments on time, every time. It's important to continually monitor your finances.
If you’re looking for a resource to help along the way, you may want to consider Chase Credit Journey®. With this tool, you can check your credit score regularly — for free. You can even receive alerts when there are changes to your credit. Keep your eye out for any changes, such as late payments, and make proactive choices to help protect your credit score.