Your Credit Score #2

Oct 30, 2014 by

dealing with debt collectors

In the first post in this five-part series on how to boost your FICO® credit score, we went over credit utilization: what is it, and what you can do to optimize this element of your credit score. Credit utilization makes up about 30% of your credit score, so managing it is important!

Credit Score Element #2: Payment History

Now let’s talk about the most important piece of the FICO score: payment history. A whopping 35% of your credit score is tied to payment history, more than any of the other four elements of the score.

I’m sure no one will be surprised to learn that creditors consider how reliably you’ve paid debts in the past to be a strong indicator of whether you’ll pay your debts in the future.

What Is Payment History?

This one’s simple. Payment history means have you made scheduled debt payments on time? If you make a credit card payment past the due date, your score’s probably going to get dinged, regardless of the reason for the late payment (assuming your credit card issuer reports the late payment to the credit reporting bureaus). There’s no sympathy for those like me with declining mental capacity. 🙂  However, the manual to FICO (which you can download for free below) does say that “[l]ate payments are not an automatic ‘score-killer.’ An overall good credit picture can outweigh one or two instances of, say, late credit card payments.”

Creditors who are likely to report late payments include credit card issuers like VISA and American Express, mortgage lenders, auto finance companies, retail stores that offer credit cards, and installment loan companies.

Big Payment History No-Nos

The payment history FICO score element includes indicators of major problems in the past with payment history. If your credit report includes bankruptcy, foreclosure, debt collection lawsuits, garnishment, liens, and court judgements against you, your score is in a world of hurt.

The older an item and the smaller the dollar amount, the less impact on your score. Still, there’s not much you can do to crush your score more than show a history of discharging debts through bankruptcy or forcing a creditor to go to extreme (and costly!) measures like suing you in order to collect a debt.

If you were a lender, would you lend to someone who filed bankruptcy a year ago and whose wages have been garnished? You might if you could have a conversation with the individual and learn why these things happened, but that’s not how modern lending works.

Late Payment Details Matter

The FICO score also takes into account just how late you are on any debt payments. Being 90 days late hurts your score more than being 60 days late, everything else being equal. Recency, however, can counter this effect. For example, FICO says “[a] 60-day late payment made just a month ago will affect a score more than a 90-day late payment from five years ago.”

Further, being late on $10,000 hurts more than being late on a $500 debt.

What Can You Do About Payment History?

You don’t need me to tell you the best action you can take to optimize the payment history element of your credit score: don’t be late on debt payments!

But the reality is almost all of us will make a late payment sometime. I’ve done so a few times simply because I somehow overlooked making a credit card payment on time and didn’t realize my oversight until the next statement came. Oops! But here’s what I did: I phoned the lender, explained that I made a mistake (took responsibility), and asked that the late charge be reversed. The lender could see my stellar payment history and that I always pay the statement balance in full. Each time I’ve asked for this consideration, the lender granted it. Also, I never saw the late payment show up on any of my three credit reports.

Also, did you know that you can add a statement to your credit report? Yep—because the Fair Credit Reporting Act forces them to, the credit bureaus Experian and TransUnion allow consumers to add multiple 100-word statements to their credit reports, while Equifax permits just a single 100-word statement at a time. Do these statements have any effect on lenders? Probably not a lot, but I can’t see any downside to adding a well done statement, particularly if your credit history had been perfect, then something nasty happened to you (divorce, layoff, illness) that caused you to get behind, but now everything is back to normal.

NEXT: The Age of Credit FICO score element!

For everything you need to know about managing your FICO credit score, read the Tips sections beginning on page 8 of this free download:

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