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You probably know you have a credit score—or, more likely, several credit scores. But do you know how those scores are calculated? The biggest factor impacting your credit is your payment history, which makes up 35% of your FICO® Score☉ . A close second is the amount of credit you're using, which accounts for 30% of your payment history. The remaining three factors—your length of credit history, your credit mix and your new credit accounts—each make up 15% or less of your FICO® Score, the credit score most commonly used by lenders.
How Important Is My Payment History?
Imagine that a friend of yours has asked you for a loan, and it's not the first time. If she has always paid back her loans on time, then you'll probably be willing to lend her money again. But if she's been late on some payments or even missed a few, then you'll understandably be reluctant to offer her another loan.
Essentially, that's the same criteria credit scoring models use when calculating your scores. They've determined that a consumer's debt payment history is the most accurate predictor of whether they'll pay back their loans on time in the future. As a result, of all the factors that affect your credit scores, payment history carries the most weight.
How Long Do Late or Missed Payments Stay on My Credit Report?
Another reason keeping up with your debt payments is so important is that late payments stay on your credit reports for up to seven years. However, their negative impact on your credit scores decreases over time.
What if you forget to send in a credit card payment by the due date but make your payment a week later? The bad news is you'll likely be charged a late fee by the card issuer—but your credit won't take a hit. Creditors won't report your late payment to the major credit bureaus (Experian, TransUnion and Equifax) until a full billing cycle, or 30 days, has passed.
If you are more than 30 days late on your payment, the effect on your credit scores will depend on how long the delinquency existed before you corrected it. For example, making a payment 60 days late will have a much greater effect than a payment that was 30 days late, but it won't be as bad as one that's 90 days late or more. That's why it's critical to correct a delinquency as soon as possible.
What Bills Affect My Payment History?
The term "payment history" can sound a little vague, so it's important to know which payments are included in your credit reports. These can include any type of loan or credit account, including credit cards, personal loans, auto and other vehicle loans, student loans, and home mortgages. Not typically included are accounts that don't represent a loan, such as prepaid debit card accounts, checking and savings accounts, and rent and utility payments.
Now, however, Experian offers a service that gives you credit for your on-time utility and telecom payments. Experian Boost™† allows you to voluntarily include these accounts in your credit file, potentially giving you an instant boost to your FICO® Score. Experian Boost only applies to those who choose to opt in, and it only takes into account your positive payment history, not late payments.
Other Factors That Impact Credit
Beyond your payment history, the next most important factors in your credit scores are as follows:
Credit utilization: The amount of available credit that you're using accounts for 30% of your FICO® Score. To figure out your credit utilization rate, divide your current credit card balances by the total credit limits across all your cards. The resulting percentage is your utilization rate. Using more than 30% of your available credit may hurt your credit scores. In general, the lower the rate, the better.
Credit history: Credit history, or how long you've had open credit accounts, makes up 15% of your FICO® Score. Managing accounts for a long period of time can help your scores, while opening several new accounts or closing existing accounts (which reduces your credit history length and also likely increases your credit utilization) can hurt scores.
Credit mix: How many different types of credit you carry, including revolving and installment credit, makes up 10% of your FICO® Score. A good credit mix—assuming you make your payments on time—can help your scores.
New credit: Creditors will consider you a higher risk if you open several credit accounts in a short time, especially if you are new to credit. In addition, each time you apply for a loan or credit card account and the lender pulls your credit file, a hard inquiry is recorded on your credit report. This can hurt your scores, but usually only for a few months.
Time It Right
Because your payment history has the biggest impact on your credit score, the best way to improve and maintain your score is to always pay your bills on time. By focusing on your payment history, while paying attention to the other factors that make up your credit scores, you can make sure that you always get the credit you deserve.