Breaking Down Payment History
The single most important factor in our credit scores.
TLDR; If you have a proven record of repeatedly paying your debts on time, then you’re trusted. So try not to miss a payment!
Payment history is a major component in credit scoring models to convince lenders to lend us money and lend it to us at lower rates.
Let’s say you have a friend, Jane, that asks you for $1,000, which they say they’ll return over their next few paychecks. This friend has worked for years at a stable job and always pays back her debts.
Now let’s say you have another friend, John, that also asks you for $1,000, but you know this friend often procrastinates in paying people back and occasionally “forgets” that he borrowed money.
Based on their past, you can make a reasonable assumption that it’s less risky to lend to Jane and would be more comfortable in lending her money over John.
If you decide to even lend to John, you might penalize him for his history by charging him interest or an upfront fee for the extra risk you’re taking on him.
This is what payment history represents to banks.
It’s difficult to predict the future, but based on how a person has acted financially in the past, banks can make their best guess on how that person will act.
In fact, according to Chase, payment history impacts your overall credit score by 40% making it the most important factor.
This is reiterated by the popular credit tracking platform, Credit Karma, which has payment history impact on credit scores marked as “high”.
If you look at their breakdown of payment histories, missing a single payment can downgrade you from Excellent to Good or lower which can drop credit scores significantly.
The way payment history gets calculated is by taking all of the possible payments you could have made across all known accounts and determining how many were actually made.
For example, let’s say we had 100 possible payments we could have made but had 5 late payments. That’s (100–5)/100 = 95/100 = 95% which puts us in the “Needs Work” rating.
All this to say, if you can help it, do not miss a payment.
My preferred method of ensuring I don’t miss a payment is to set all my credit accounts (10+) to autopay and I highly recommend everyone do this.
Make sure to check the first time you set it up to make sure it was done correctly.
This is combined with regular checks on my main banking account to make sure it can cover my expenses. If I happen to have a large balance that month, I can adjust the autopay amount as opposed to turning it off and making manual payments.
The goal here is to automate away even the possibility of a missed payment and ensure our score puts its best foot forward.
Follow along for a breakdown of credit components, how to optimize your credit profile, and ways to leverage your credit once you’ve got it!
If you’d like a recommendation on one of my favorite credit cards, check it out here: