Table of Contents
What is payment history?
Your payment history is a record of the payments you’ve made on your credit cards, loans, and other credit accounts. If you generally pay your bills on time, you’ll have a good payment history, whereas if you frequently miss or make late payments, you’ll have a bad one.
In the main credit scoring models used by the credit bureaus (FICO and VantageScore), payment history is the most important factor on your credit report that influences your credit score. This is because research shows that the way you handled your debts in the past generally predicts how you’ll handle them in the future.
You can view your payment history by requesting your credit reports from each of the three main credit bureaus in the US (TransUnion, Equifax, and Experian). You’re entitled to one free credit report every year from each bureau, which you can get by visiting AnnualCreditReport.com. Although some sites like this are scams, AnnualCreditReport is safe (and, in fact, is authorized by the federal government to provide your credit report).
What percentage of your FICO score is determined by payment history?
Your payment history makes up the largest portion of your credit score, accounting for 35% of your total FICO credit score.
In the VantageScore model, payment history is even more influential, accounting for 40%–41% of your total score.
Factors influencing your FICO score
|Payment History||Credit Utilization (Amounts Owed)||Age/Length of Credit History||Credit Mix and Experience||New Credit (Accounts) Opened|
Factors influencing your VantageScore
|Payment History||Credit Utilization||Depth of Credit||New Credit (Accounts) Opened||Balances||Available credit|
How payment history impacts your credit score
Unfortunately, this also means that a single negative mark, such as a late payment, can do a lot of damage to an otherwise blemish-free credit report.
All of the following marks can appear on your credit report and seriously harm your score because they indicate a failure to repay a debt as agreed:
How late and missed payments affect your credit score
The impact that late or missed payments have on your credit score depends on how late they were, how many there are, and how recently they occurred.
Recent missed payments bring down your credit score more than old entries. Moreover, late payments have an increasing impact on your credit score as they progress from 30, to 60, to 90+ days overdue. 4 5
Your credit will also take a harder hit if your credit score was relatively high to begin with.
When an account becomes severely delinquent (usually after 4 to 6 months without satisfactory payments), several things can happen. If it’s an unsecured debt, then your creditor might mark it as a charge-off, close the account, and transfer or sell it to a debt collection agency. 6 If the account is a secured loan, like a mortgage or car loan, then it might go to foreclosure or repossession.
Although it’s hard to predict how long it’ll take for your credit score to recover after a late payment, it can take months to years. For instance, FICO has published data indicating that mortgage payments that are late by 30 days can affect your credit score for 9 months to 3 years. Payments that are late by 90+ days can affect it for up to 7 years, with higher scores taking longer to fully recover. 7
Types of credit accounts that form your payment history
There are three types of credit accounts, all of which can show up in your payment history:
- Installment loans: These are lump sums that you borrow and repay in installments over a fixed period. Examples include mortgages, auto loans, and student loans.
- Revolving credit: This is money that you can continually access from a single line of credit up to a certain limit. If you don’t pay off your balance in full at the end of the month, your remaining debt carries over (revolves) into the next month. Credit cards are the most common form of revolving credit. Other types include personal lines of credit, home equity lines of credit (HELOCs), and retail accounts.
- Open credit: This consists of money or services that you receive upfront and must pay for in full at specified intervals (usually monthly). The most common examples of open credit are utility, internet, cable, and cell phone accounts.
How do bills affect your credit score?
Installment loans and revolving accounts automatically appear on your credit report, meaning that they can have either a positive impact (if you always pay on time) or a negative impact (if you have overdue balances). 5
On the other hand, most open credit accounts won’t appear unless you miss a payment, meaning that they can’t positively contribute to your payment history, but can negatively affect your credit score if you don’t pay your bills.
Factors that make up your payment history
The payment history component of your FICO score is calculated based on the following factors: 8
- Number of accounts that are in good standing (paid off or paid as agreed)
- The percentage of accounts that have late payments
- Number of public record entries you have, such as bankruptcies and tax liens
- Amounts owed on delinquent accounts or collections
- How late your payments currently are or have been in the past
- How recently a delinquent account, collection, or adverse public record item was reported
How to fix your payment history on your credit report
Seeing a sudden drop in your credit score due to a late payment on your credit report can be frustrating. Thankfully, the effects of negative marks always diminish over time if you address them and work toward reestablishing a good payment history.
Take the following steps to improve your credit score:
- Dispute errors on your credit report
- Bring your accounts current
- Pay your bills on time
- Reassess your credit accounts
- Seek assistance from your creditor or a credit counselor
Dispute errors on your credit report
If there are negative items on your payment history, it’s possible that they’re errors. Get a copy of your credit report and check it to see if there are any mistakes. A study from 2013 found that one in five Americans had an error on at least one of their credit reports. 9
Check your reports from all three of the major credit bureaus (Equifax, Experian, and TransUnion). If there’s an error on your report, it may have originated with the original creditor, or it may be the fault of the credit bureau that produced the report. You should contact both to dispute the error.
It’s worth doing this even for small errors. Getting a hard inquiry off your credit report, for instance, could add up to 5 points to your credit score. In more extreme cases, getting a very damaging item like a repossession removed from your credit report could earn you 100 points or more.
Bring your accounts current
If you already have overdue accounts, then you should bring your accounts current before you do anything else. Bringing your accounts current means paying off all of your overdue balances.
Note that doing so won’t remove the late payments from your credit reports. They’ll remain on your reports for seven years. However, paying off your debts will protect you from incurring any further negative marks.
If you have a good relationship with your creditor and previously had a good payment history, then you might be able to remove the late payments you’ve already incurred removed by sending a goodwill letter to your creditor. This doesn’t always work, but there’s no harm in trying. Your odds are better if there were extenuating circumstances that caused your payment to be late.
Pay your bills on time
A single late payment can do a lot of damage to your credit score. For example, depending on the scoring model, the type of credit account you missed the payment on, and your credit history, your score could drop 80–105 points from a single 30-day-late payment or up to 180 points from a 90-day-late payment. 10 5
Needless to say, the best way to protect your payment history is to consistently pay all of your bills going forward. If you previously missed payments because you simply forgot about them, try setting up autopay or payment reminders. On the other hand, if the problem is that you’re financially struggling, then you may need to consider using less credit until your finances improve.
Reassess your credit accounts
If you have a poor payment history, there’s a chance that you have either too many accounts or you don’t have the right type of accounts. Consider making one of the following changes to your credit profile to help establish a good track record of on-time payments.
Consolidate your debts
Debt consolidation is a way of reorganizing all of your debts so that you only need to pay off one loan with one interest rate (ideally a relatively low one).
This is a helpful strategy if you have many high-interest debts, such as credit card debts. In addition to saving money on interest, consolidating your bills simplifies your finances and reduces the risk of missing a payment.
Debt consolidation generally requires a good credit score because it involves applying for new credit, either in the form of an installment loan or credit card.
To consolidate your debts, you can get one of the following:
- Debt consolidation loan: This is a type of personal loan that you use to pay off all of your debts. You then repay the loan in installments over a fixed repayment period.
- Credit card balance transfer: When you perform a balance transfer, you use a credit card with a low interest rate to pay off the outstanding balances on your other credit card accounts.
- Home equity loan: With this type of loan, you use some of the equity you have in your house (usually no more than 85%) as collateral for a loan. 11 Although home equity loans usually have very low interest rates, they’re one of the riskier loans you can get because you can lose your house if you can’t make your payments.
With all of these approaches, the goal is to turn multiple debts into a single, larger debt that requires lower payments than you’d otherwise have to make.
Note that despite its potential to improve your payment history, debt consolidation can also temporarily harm your credit score by increasing your credit utilization rate, reducing the average age of your accounts, and triggering a hard inquiry.
Before committing to this approach, make sure that you’re prepared for a temporary dip in your credit score.
Apply for a secured credit card
Secured credit cards are designed for building credit and typically have low credit score requirements (if they have any at all).
They function in much the same way as unsecured credit cards, except you need to pay your creditor a deposit that they can use as collateral. The credit limit on a secured card will generally be the same amount that you paid for the deposit.
It’s important to bear in mind that you can’t use your security deposit to pay your bills. Your creditor will only use your deposit if your account goes into default. Moreover, if you miss a payment, then you might need to pay late fees, and your credit score will drop if the payment is 30 days late or more.
With that said, as long as your payments are always on time, secured credit cards are a great way of improving your payment history without the risk of getting into more debt than you can pay off.
Ask for help if you need it
If you have debt you’re struggling with and you’re feeling overwhelmed, then there are people who can help you manage your finances and come up with a repayment plan that’ll let you rebuild your credit.
Consult a credit counseling agency
If you’re not quite sure what the next step is and you want some professional guidance, then you can work with a nonprofit credit counselor.
A good credit counselor can help you manage your debt and figure out a repayment plan. They may also offer you a debt management plan if you need more help fixing your credit.
Be careful when signing up for a credit counseling service to avoid getting scammed. In particular, don’t sign up if you spot any of the following warning signs:
- You’re required to pay a large fee upfront before you’ve been offered any assistance 12
- You’re being pressured into a debt management plan before your credit counselor has carefully reviewed your credit history
- They promise to erase all your debt overnight
- They offer you an employer identification number to use instead of your social security number when applying for credit
Negotiate with your creditor
If you’re financially struggling and think you might miss a payment, don’t hesitate to contact your creditor. They may be able to help by establishing a new repayment schedule for you or even reducing your interest rate.
After all, it’s in your creditor’s interests to help you pay back your debts instead of allowing you to default on them, so reach out if necessary to come up with a solution that suits you both.