On-time payments are a simple concept, but do you know how influential they can be to your credit scores? Turns out, one of the key components to building credit is as simple as making sure you don’t pay late on your bills. Read on to find out why.
How On-Time Payments Factor Into Your Credit Scores
When a lender looks at credit scores, what they want to understand is the likelihood that a prospective borrower will repay money lent to them. If there are indicators that someone might struggle to repay, then that applicant might not get approved.
If they do get approved, it will often be at a higher interest rate, which is used as a sort of security blanket for the lender. The way lenders see it, charging riskier borrowers more in interest helps them recoup any future costs if that person goes delinquent on their account.
And that’s why making on-time payments is so important to your credit scores. Though one of the many factors influencing your scores, your payment history shows a lender how reliable you might be. The better your payment history, the better you look as a borrower.
Take a look below to see how highly FICO® ranks payment history in its credit scores:
|FICO® Credit Score Factor||Percentage|
|Length of credit history||15%|
And check out the chart below to see how important payment history is to your VantageScore® credit scores:
|VantageScore® Credit Score Factor||Level of Influence|
|Payment history||Extremely Influential|
|Type of credit and duration of credit||Highly Influential|
|Credit utilization ratio||Highly Influential|
|Total debt||Moderately Influential|
|New credit inquiries||Less Influential|
|How much available credit you have||Less Influential|
As you can see, payment history is the most important factor for both credit scoring companies. Here’s what you can do about it.
How You Can Use On-Time Payments to Improve Your Credit
This is going to sound almost too easy. If you want to build or repair your credit, start by paying the full monthly amount due on all of your bills and do so on time. And that doesn’t just mean your credit card bills.
You can also hurt your credit by missing a payment on your regular bills, such as your utility bills or cell phone. These companies can report late payments to the credit reporting agencies just like financial institutions. If those bills continue to go unpaid, they can even be sent to collections. In short, even if you pay your credit card on time but then you pay late on an electric bill, your credit can suffer.
So, how can you ensure that your payment history is helping you? Consider the following:
- Sign up for automatic bill pay through your bank account or other company whose services you pay for every month — then you can be sure you’ll never miss a payment.
- If you’re carrying multiple credit card balances, consider consolidating them so you only have one payment to make each month.
- If you know you might struggle to repay a debt or other bill, contact your lender or servicer immediately. They might be able to grant you a temporary forbearance or change your due date to help you remain current during tough times.
On-time payments are an important factor in your credit scores and one you have almost complete control over. Anytime you think you might be late making a payment – for whatever reason – talk to your creditors. Oftentimes, if you have a good payment history, they are willing to waive any late payment fees or will agree to not report your late payment if you are communicating with them. If you do this, it’s important to make the payment as soon as you can. If you’re already falling behind and your credit is being negatively impacted, you may want to talk to a financial professional, such as a nonprofit credit counselor or even a bankruptcy attorney, to examine your options before things get out of hand.
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