Your FICO credit score depends on five categories of information, and payment history is the most important. If all your credit accounts show flawless payment histories month after month, it can help you achieve an excellent credit score. On the other hand, a history of late payments or other derogatory payment history information can have a big negative impact.
How important is your payment history?
It's a popular misconception that the FICO credit score is based only on your payment history -- that is, how well you've paid your bills on time. While your payment history is the largest component of the FICO scoring formula, it is one of five categories of information that are considered when determining your FICO score.
Here's a breakdown of the five categories of information in your FICO credit score and the importance of each one.
- 35%: payment history
- 30%: amounts owed
- 15%: length of credit history
- 10%: new credit
- 10%: credit mix
The takeaway is that while your payment history is the single most important component, another way to look at this is that 65% of your FICO score is determined by information other than your payment history. In other words, while a solid payment history can certainly help your credit score, you cannot achieve a perfect FICO credit score with a solid payment history alone. Similarly, a few late payments won't necessarily kill your credit score, if your other categories are full of positive catalysts.
What is included in the "payment history" category?
Your payment history consists of your record of paying (or not paying) certain types of accounts on time, including but not necessarily limited to:
- Credit cards
- Retail lines of credit
- Installment loans, like auto loans and student loans
- Other lines of credit, such as a home equity line of credit (HELOC)
Generally speaking, paying rent to a landlord is not included in your payment history for credit scoring purposes, and neither are accounts such as utilities (electric, water, etc.) or for recurring services such as pest control, security monitoring, and more. However, while your payment history for these types of accounts are not considered, nonpayment of these obligations can result in collection activity, which can affect your FICO score.
How much does a negative payment history hurt your FICO score?
Late payments are the most obvious type of derogatory information that can affect your payment history. In addition, public record and collection items can also adversely affect the 35% of your FICO score made of your payment history. These can include:
While the exact FICO formula is not public information, as a general rule, negative items can affect your credit score for seven years (10 years in certain types of bankruptcy). Older information tends to have less of an effect than newer information, and the severity of the derogatory information also plays a role. For example, if you are 30 days late on a credit card payment, it won't ding your credit as much as a 90-day-delinquent account, which won't hurt as much as a bankruptcy.
In addition, negative information tends to affect otherwise higher credit scores more. As an example, someone with a FICO score of 780 could experience a 90-110 point drop from a 30-day delinquency, while someone with a 680 could experience a more moderate drop of 60-80 points.
The Foolish bottom line on payment history
While your payment history isn't the only thing considered when your FICO credit score is determined, it's the single most important category of information. A strong payment history can help you achieve an excellent credit score and qualify for the best credit card offers and lowest interest rates on loans, while a poor payment history can cause your FICO score to plunge.