Most consumers know how important their credit score and credit reports are. Good credit is your key to affordable loans and credit. But building credit is impossible without on-time payment of bills, loans and credit card. our payment history. To have good credit, you’ll need to know what a payment history is and its importance.
“On-time payments are a huge aspect of having healthy credit,” says Joshua Eke, business development manager, Factor Funding Co. “Lenders will use this to determine whether or not you are a responsible borrower and evaluate your financial responsibility.”
What is payment history — and how does it affect credit?
To understand what payment history is and how it impacts your credit, it helps to understand how lenders use credit scores and reports.
“The purpose of credit scores is to rate how likely you are to default on a loan,” says Randall Yates, CEO of loan comparison site TheLendersNetwork.com. Your credit report is a collection of all of your behavior as a borrower or account holder.
Lenders, credit card companies, and other payees report your account information and payment behavior to the three major credit bureaus. This tracks when you make (or miss) payments on bills, loans or credit accounts. This information appears on credit reports and is used to calculate your credit score.
“Your payment history has the biggest impact on your credit score,” Yates says. For example, the majority of your FICO score (35 percent) is based on your payment history.
Payment history is the single most important factor in calculating your credit score. A positive payment history won’t automatically give you a favorable score. But it’s almost impossible to build good credit without on-time payments.
How lenders view missed vs. on-time payments
In addition to its impact on your credit score, lenders will also review your payment history on your credit report. “On-time payments show that the borrower is responsible and will continue to pay their bill over time,” Eke says.
Any hiccups — late payments, missed payments, delinquencies or defaults — can derail your credit score, at least temporarily.
“Lenders will look at your credit history, and late or missed payments can be a huge red flag,” Eke adds. This can make it harder to qualify for loans – personal, business or a mortgage. If you are approved, you’re less likely to qualify for the lowest interest rates.
If you do have missed or late payments on your credit report, that will lower your credit score and be a mark against you. The cleaner your payment history, the better.
What happens if you miss a payment?
“A single 30-day late payment can drop one’s credit score by as much as 100 points,” Yates says. “Sixty-day and 90-day late payments can hurt your credit score even more and can take years to recover from.”
However, one or two missed payments won’t necessarily kill a good credit score. If you have an otherwise healthy credit and payment history, that will help offset the effects of a late or missed payment.
Lenders will also have different credit requirements and underwriting models. While some lenders might be willing to overlook one or two late payments, “many lenders will require you to have no missed payments in the last 12 months,” Yates says. Research different lenders’ credit standards to make sure you’re a good fit before sending in a credit application.
If you already have late payments on your credit report, it’s all the more important to make your payment as soon as possible and continue on-time payments. Your credit can recover within six to 12 months and will stop being a factor after three years, according to Yates.
What to do if you’re going to miss a payment
Maybe you missed a payment because you didn’t have enough money. Or maybe you accidentally missed the due date. Being proactive can help you work something out with your lender and minimize the negative impact of a late or missed payment on your credit.
First, you’ll want to know what your lender’s policy is on reporting late payments. “Most lenders won’t report late payments until it’s 30 days or more past due,” Eke says. “Some may also have data reporting models that will give you a pass on your first missed or late payment.”
If you can make your payment just a few days late, you might be able to curtail the worst consequences. You can also reach out to your lender to try to work out another solution or arrangements.
“If a borrower cannot afford to make the full payment, they should call the creditor and tell them they can’t pay it,” Yates says. “The creditor may be able to take a partial payment and let you catch up on the next payment. Or you can ask if they can change your billing date back a week or two to allow you extra time.”
Tips for a positive payment history on credit report
Whatever your payment history has been up to this point, you’ll need to make on-time payments in the future to improve or maintain your credit.
“The most common reason borrowers miss a payment is simply because they forget,” Yates says. Luckily, there are some easy tricks you can use to ensure you never forget a payment.
Eke suggests setting alarms or reminders on your phone to remind you of important bill due dates. Some banks, credit card issuers or other billers also have the option to enroll in text alerts or email notifications for upcoming payments.
Even better, set up automatic bill payments — some lenders will even give you an interest rate discount for auto-pay enrollment. “This is the single best thing you can do to avoid any late payments,” Yates says. “Setting up automatic payments either with your creditors, or using online bill pay with your bank will eliminate the chance you will forget again.”
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