You may already know that the biggest part of your score is determined by your payment history. Lots of people know this but they don’t really know how much of their score is caused by it or what the different pieces of it are.
Even though your payment history is the biggest part of the calculation of your credit score, it is still only 35% of it. It would make more sense to most people if the way they pay their bills was worth a lot more than a third of their score.
I couldn’t tell you how many times I have had people call me for a loan and tell me that their scores aren’t that high but that they pay everything on time every month and have done so for years. There is always a tone in their voice that tells me they don’t think it’s fair. Maybe it isn’t.
But fair or not, it is still the system we are working with. We may not be able to change the scoring system, but knowing how it works can help us overcome its pitfalls. So without further discussion, I am going dive into how your payment history affects your credit score.
There are three main parts of your payment history. They are recency, frequency and severity.
Recency means how recent any late payments have been made. If a payment was late this month, it will have a far greater effect on your score than if it had been two years ago.
You can even divide late payments or on-time payments into three different time-periods to see how much effect they will have on your score. Anything within the last 6 months will have the biggest effect. The next tier is from 7 to 24 months and the last tier is anything more than 24 months ago.
Frequency has to do with how many times late payments have occurred on your credit report. If you have only one late payment on your entire report, it shouldn’t affect your score too much, unless it is your only account but I will get to that later.
Severity has to do with how late a payment (or payments) have gotten. Nothing is reported to the credit bureaus unless your payment is at least 30 days late. So if you missed the payment due date and were charged a late fee, it does not mean that it will show up on our credit report.
Late payments are reported in 30-day increments. A payment could be 30 days late, 60 days late, 90 days late, 120 days late or 150 days late. That is the highest it goes on a credit report.
The 90-day late will have a far greater effect on your credit score than a 30-day late payment.
Combine these three things and that is 35% of your credit score.
For more information about credit, you can find my book, Crack The Credit Code, To Play The Game, You Need To Know The Rules which is available on Amazon. Or, go to my website, CrackMyCredit.com.