FICO Credit Score 101: Payment History

In our first blog post, we gave you 5 easy tips to improve your credit score, along with an overview of how your credit score is calculated. In this series of posts, we’ll delve deeper into your FICO credit score and arm you with the knowledge to design a plan for your particular credit situation.

For better or for worse, your FICO credit score is an important part of your financial picture. Many lenders base their decision (as well as the interest rate) for loans on your FICO score. That means that if you ever want to buy a house, you should start thinking now about how to maximize your credit score. Even if you are confident in getting approved, a lower score can save you tens of thousands of dollars in extra interest over the course of the loan.

There are three credit bureaus that are licensed to calculate your FICO credit score – Experian, Equifax, and Transunion. While each uses similar models, they may have different data which may result in different scores. You need a sufficient credit history for these bureaus to calculate any FICO score, which means you must have at least one account open for 6 months or more, as well as some activity in the last 6 months.

Part 1: Payment History (35%)

Concept for mobile apps The first and most important thing a potential lender wants to know is if you have paid past credit accounts on time. This portion of your credit score calculation counts for over one-third of your overall FICO score, but it’s one of the easiest to get right. In general, paying your bills on time is the best thing you can do to improve your credit score.

If you do have a late payment, the impact on your credit score will depend on how late your payment was, how much you owed, how recently it happened, and how many times it happened. Older items and smaller amounts will count less than newer items and larger amounts. A good overall credit picture can outweigh one or two late payments, but it is in your best interest to avoid any occurrences of late payments in the first place. If you accidentally miss a payment, pay off the balance as soon as you can and speak to your bank – they may be willing to omit the late payment from your credit reports.

The types of accounts that typically report your payment history include credit cards, retail accounts (like department store cards), installment loans, and mortgages. However, not paying a regular bill, such as utilities, hospital, or even cable bill, can also find its way into your credit score with negative implications.

In addition, other negative factors on this portion of your credit report may come from bankruptcy, foreclosure, lawsuits, wage attachments, liens, or court judgements. In fact, declaring personal bankruptcy (both Chapter 7 and Chapter 13) can continue to adversely impact your credit history for up to 10 years!

While paying your bills on time does not guarantee a perfect credit score, it’s the first and most impactful step to improving, and maintaining, your credit.

Read Part 2 of the series on Amounts Owed here.

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