It should come as no surprise that the way you pay your bills—particularly, the consistency with which you pay them—has a huge impact on your credit scores. And while there are certainly other factors that influence your credit scores, your payment history is the most influential factor of all.
The bottom line is that if you want to earn and maintain solid FICO and VantageScore credit scores, you've got to pay your bills on time, all the time, every time.
If you're already facing credit problems due to a less-than-stellar payment history, all isn't lost. You can absolutely start making positive changes to rebuild your credit for the future—and the first step you should take is learning more about how to master the most important factor in your credit scores.
How Much Does Payment History Matter?
No matter who is pulling your credit scores, and no matter which credit scoring model or brand is being used, there is nothing on your credit reports that holds more weight than the presence—or lack—of derogatory information.
If you're bad at making your payments on time, you risk losing more than a third of the points that make up your FICO and VantageScore credit scores.
Here's how it works: When a credit scoring model evaluates the payment history on your credit reports, the model is essentially looking for blemishes on your report. If certain negative information is present on your credit reports, you'll earn fewer points (and therefore a lower credit score) than you would have earned had that negative information not existed.
Which Information Hurts Your Score?
Here are some of the derogatory credit report items—aka credit red flags—that scoring models will look for when calculating your credit scores:
- Late payments: This includes the severity, frequency, and recency of any late payments. In most scoring systems 30- and 60-day delinquencies are considered "minor," and anything 90 days past due or worse is considered "major."
- Charge offs: A charge off occurs when you default on an account and it is deemed to be uncollectable.
- Collections: A collection occurs when a defaulted or delinquent account is outsourced to a debt collector.
- Public records: There are three public records that can appear on a credit report; tax liens, bankruptcies, and judgments. They are all considered to be derogatory.
How Much Will a Negative Payment History Hurt You?
As with most credit scoring questions, the answer is "it depends." In some cases, even one late payment will lead to a considerably lower credit score. Other times, even a major derogatory entry will have no measurable impact on a score.
For example, someone who has perfect credit and a score of 820 could see their score plummet if a new collection hits their credit reports. However, someone who already has 10 collections likely won't see their score change at all if collection number 11 hits their credit reports.
There is no fixed value to any derogatory entry. Their value is always relative to the presence or absence of other similar derogatory entries on a credit report. So, the answer to the question "how much?" varies from "not at all" to "a whole lot"—and everything in between.
How Long Will a Negative Payment History Hurt Your Credit?
If you're trying to rebuild your credit, then the good news is that credit mistakes or misfortunes do not simply continue to haunt your credit scores forever. Thanks to the Fair Credit Reporting Act (FCRA) there is a time limit that dictates how long most negative information is legally allowed to remain on your credit reports.
For example, collection accounts must be purged from your credit reports seven years after the date of default on the original account. Late payments must be removed seven years from the date of their occurrence. Bankruptcies can remain for up to 10 years.
While these time frames might seem punitive and unfair, credit scoring systems are actually much more consumer friendly. As derogatory items age, they have less and less negative impact on credit scores. In fact, you could actually have very solid credit scores with derogatory information polluting your credit reports, as long as the derogatory information is very old and close to being purged by the credit reporting agencies.
Of course, the easiest way to escape the damage of derogatory credit entries is to avoid them in the first place: Pay your bills on time, every time, time after time.