The single most important factor influencing your credit score, no matter which algorithm is being used, is your payment history. Some measures count your payment history for as much as 35 percent of your credit score.
Why does your payment history matter so much for your credit score? The answer is fairly simple once you realize the entire point behind credit scoring, and what it’s meant to accomplish.
The Point of Credit Scores
Credit scores are designed to compress your entire history with loans into a single three-digit score. Credit scores are supposed to give lenders (and other financial services providers) insight into your habits regarding credit and your finances. A credit score is a quick way for lenders and others to judge your likely level of responsibility when it comes to your interactions.
A lender wants to know that you are probably going to make your payments in full and on time. It means that you are less likely to default and cost them money. Because lenders are most interested in whether or not you are going to be reliable with your payments, it makes sense that your payment history is the largest factor influencing your credit score.
Payment History and Your Credit Score
Your payment history is recorded in your credit report. The lenders you have worked with in the past, from credit card issuers to car loan servicers to student lenders, all report your payment history to the credit bureaus. They might report each month, or make reports less frequently. When they report, they share information about whether or not you paid on time, and whether or not you paid the full minimum required.
If you pay late on a regular basis, or miss payments altogether, that is reported to the credit bureaus. If you pay less than the minimum that is also reported. These types of items on your credit file can drag down your credit score, indicating that you are unreliable. Lenders will see that your credit score is lower, and either reject your loan application, or reduce their risk of losing money by charging you higher interest.
When you pay on time and in full, though, that also gets reported. Credit card issuers report more frequently than almost any other lender, and this is why using a credit card responsibly can be one of the fastest ways to establish a good credit history. When you pay on time and in full that is reported to the credit bureaus and taken into account for your credit score. You have a higher score, and lenders are comfortable with you, feeling that you are likely to repay your loan. You are rewarded with a lower interest rate that can save you thousands of dollars over the life of your loan.
If you are trying to build a good credit score, it’s a good idea to start with your payment history. Make your payments on time and in full, and you will likely see an improvement after a few months.