Tips for Improving Your Credit: Your Payment History
If you’re looking to improve your credit in the long-term, well, then, you’ll want to establish a spotless payment history. Your payment history, also known as payment performance, is the record you’ve established by either paying or not paying your bills on time — and it’s the most important factor among major credit scores, accounting for about 35% of most models.
Basically, a positive payment history reflects that you’ve paid all your loans back on-time and as agreed. A negative payment history, conversely, reflects that you’ve missed payments or haven’t paid what you owe in full. When it comes to payment history, a single misstep can really cost you. According to a study from credit score company FICO, a single 30-day late payment can drop a good score (around 780) by 90 to 110 points. To keep your score from this type of pitfall — and to help improve your credit — let’s break down everything you need to know about your payment history.
How Can I See My Payment History?
Your payment history will appear on your credit reports, which you can get for free each year at AnnualCreditReport.com. And you can also check your credit every 14 days using Credit.ly credit report snapshot. This completely free tool will break down your credit score into sections and give you a grade for each. You’ll see, for example, how your payment history, debt and other factors affect your score, and you’ll get recommendations for steps you may want to consider to address problems. In addition, you will also find credit offers from lenders who may be willing to offer you credit. Checking your own credit reports and scores does not affect your credit score in any way.
How Do Credit Reports Know Your Payment History?
Your lenders know whether or not you pay your bills on time and they will report your payment history to the credit reporting agencies…good or bad. As such, your credit reports will reflect your payment history on any credit account you’ve had in the past 7 to 10 years. This includes, but is not limited to, student loans, mortgages, bank and retail store credit cards and auto loans.
This is a process called “lender reporting” whereby your lenders will send the three major credit reporting agencies — Equifax, Experian and TransUnion — the current status of your account each month. Once received by the credit reporting agencies this information is loaded and then run onto their databases thus creating an updated record of your accounts month after month. See the Credit Report Example below:
|Subscriber||Discover Card||Citibank||American Express|
|Minimum Monthly Payment (Terms)||$19||$2,000||N/A|
|Date Opened||on April, 2012||August,1998||July,2004|
|Date of Status||on March, 2016||March, 2016||March, 2016|
|Last Payment Date||on February, 2016||February, 2016||February, 2016|
|Loan Type||Credit Card, Terms REV||Mortgage||Credit Card, Terms OPEN|
The data that lenders report each month is generally based on the activity that occurred on that account during the previous billing period. As such, at any given time your credit reports will be displaying data that is 30-60 days old.
What Matters to My Credit Scores When it Comes to Payment History?
Your Current Status
Your current status is the rating of your accounts as of the last time they were reported to the credit reporting agencies by your creditors. The best “status” you can have on any account is “Paid As Agreed.” This means that the account is being paid according to the terms of the agreement you signed with the creditor. If your account is past due then your current status rating will reflect as such. The current status is generally displayed as a numeric value ranging from 1 to 9. If your account is paid as agreed then the rating will be a “1.” Essentially any rating other than a “1” is bad. And, as the numeric rating ascends from 2 through 9 it represents a worsening level of account delinquency.
|1||Account being paid as agreed|
|2||1 to 30 days past due|
|3||31 to 60 days past due|
|4||61-90 days past due|
|5||Referred for Collection|
|7||Account being paid by either a chapter 13 bankruptcycourt or a non-profit financial counselor|
|9||Account has been charged off|
Your lenders are responsible for assigning and reporting the numeric status of an account. They each have policies that govern when they will start reporting a status other than 1. Some lenders will choose to be more consumer-friendly and not report a status greater than 1 until the consumer becomes several months past due. Other lenders will report you with a past due status the day you become past due. It just depends on the lender’s reporting policies.
Prior Late Payments
Prior late payments are a record of any historical late payments made on an account. If, for example, you miss your auto loan payment this month, you should expect to see record of this missed payment on your credit reports the next time your auto lender updates your account information with the three credit reporting agencies. If you subsequently make the payment and become “paid as agreed” on the account then your lender will change the account to show it as paid on time but with a prior late payment. If you miss a payment for two consecutive months then your lender will report two missed payments. This pattern will continue until the account is paid and marked as “current” by the lender.
How Long Do Late Payments Stay on Your Credit Report?
As with all items on your credit reports there is a statute of limitations that governs the amount of time that late payments can continue to be reported. Prior late payments will remain on your credit report for no longer than seven years from the date the delinquency occurred.
The credit reporting agencies program their systems to automatically remove prior late payments on or just prior to their seven-year anniversary. As such, there is no need for consumers to ask that they be removed. However, if a late payment remains on your credit report after that seven-year mark has passed, you can dispute it with the credit reporting agencies to have it removed. (You can.)
How Long Does a Late Payment Hurt Your Credit Score?
Here’s the bad news: Payment history is supremely important. As we mentioned earlier, 35% of the points that make up your major credit scores is based on your payment history. A full one-third of your score is determined on this category alone. This means that if you have a poor payment history then it is unlikely that your scores will be high enough to ensure competitive interest rates and optimal terms when you apply for credit. (Conversely, having a solid payment history is a great first step towards earning a solid credit score.)
Here’s the good news: A single late payment won’t hurt your credit forever. Sure, that faux pas will stay on your credit reports for seven years, but, depending on your credit profile and what happens next, your score could rebound sooner than that. If you get the account back in good standing and resume making on-time payments, your score could return to where it was before the late payment hit your credit report in a few years.
Bottomline: The further you get away from the delinquency, the less impact it will have on your scores. Now, if a single late payment leads to bigger credit score woes, you’ll do more damage and have a longer road to recovery. What do bigger credit score woes entail? Let’s break it down.
A little known area of concern that can have a huge impact to your credit is the plain English text that describes your accounts. These are called Narrative Codes. Narrative Codes are found alongside the account listings in your credit report. There are scores of Narrative Codes with these being some of the most common:
- Home equity
- Real estate mortgage
- Line of Credit
- Credit Card
- Paid account / zero balance
Narrative Codes can either have a neutral or negative impact on your credit standing. The following are examples of Derogatory Narrative Codes that will have a profound negative impact on your credit reports and any credit scores that are generated from your reports.
- Charge off
- Paid Charge off
- Foreclosure Process Started
- Redeemed Repossession
- Settlement accepted on this account
- The Account included in wage earner plan
- The Account included in bankruptcy
Public Records or Collection Items
The public records as reported by the credit reporting agencies are bankruptcies, judgments and tax liens. Courthouses do not report to the credit bureaus in the same way a lender reports. Instead, the credit bureaus hire public record “vendors” to go to the courthouses and collect and verify public record information and then report it on your credit files. In the case of public records, none of them is good for your credit. Any public record that shows up on your credit file is considered negative and will impact your score significantly.
Collections are not public records but they are almost always listed in the same section of the credit report as public records. As such, that section is now almost always referred to as “Public Records or Collection Information.” They occur when your lenders choose to sell your past due accounts to a 3rd party company that specializes in collecting debts from consumers. Also collection agencies get a fee from the lender based on a percentage of the amount they collect from you. Collections, like public records, will impact your score significantly.
How Do You Earn the Maximum Points in the Payment History Category?
In this case it’s quite simple. Your bills must always be paid on time and reflect a “paid as agreed” status. You also cannot have any prior late payments, any derogatory narrative codes, any public records or any collections. This sounds like a lot to keep track of but it’s really not difficult. It all starts with making your payments on time. If they’re on time then the slew of negative items mentioned above can never occur.