How Payments Affect Credit Score

Of the many factors that affect your credit score, payments are arguably the most important. Keeping up with payments improves your credit score, while missing payments destroys it. It can take years of financial diligence to repair a few months' worth of mistakes. Managing your payments responsibly is the best thing you can do for your credit score.

Credit Scores

A credit score is a three-digit summary of your credit history over the last seven years. Each of the three major credit bureaus calculates its own credit score using a slightly different formula, so you have at least three scores. Your credit score reflects your overall debt amount, your repayment history, the length of your credit history, the type of credit you use, and other factors. Every time you miss or are late with a payment, your credit score will drop. Making payments on time will raise or maintain your credit score.

Preventing Missed Payments

It can be hard to keep track of all your bills. If possible, try to set up an automatic payment to pay the minimum amount each month. Pay more than the minimum if you can, but always try to pay at least the minimum. If you're late once by a few days, it won't hurt your score very much, but if you're late regularly, or if you fall behind by more than 90 days, you can lose over 100 points. It can take up to two years of regular payments to undo this damage.

Why It Matters

Many people don't think about their credit scores unless they are applying for a mortgage, when 50 points can make a huge difference in getting a loan. However, your credit score affects many other aspects of your life. Every time you apply for a loan, a credit card or a cell phone contract, the lender will run a credit check. Many property owners run credit checks before renting out apartments. Some employers have even started running credit checks on prospective employees. No one wants to employ someone who is bad with money, so a bad credit history can hurt your chances of getting your dream job.

Raising Your Credit Score

In addition to keeping up with payments, you can raise your credit score by paying down enough debt to decrease your debt-to-credit ratio. If you've paid off a credit card, don't automatically cancel it; keeping the same card for several years will increase the length of your credit history. You should also diversify the types of credit you have. Lenders like to see that you can pay off different types of debt, not just credit cards.