Your payment history is one of the most important factors on your credit report. Lenders use it to help them determine your creditworthiness before approving you for a loan.

What is payment history?

Your payment history is just that: a history of your past payments and payment habits. This includes payments that were made on time or late, delinquent payments.

It is one of the simplest things on your credit report, yet it can have a huge impact on your credit score and overall creditworthiness.

Why does payment history matter so much?

Most people understand that paying your bills on time will look better to a creditor than paying them late. Paying on time is also important to avoid late fees and keep unpaid bills from charging off and going to collections.

However, payment history is more important than this. Your payment history can be the key to locking in lower interest rates and terms, and may have a huge impact on your credit score like no other single factor does.

This is because payment history is a direct snapshot into how you deal with the credit you have. If you constantly pay on time and work to lower your debts, this reflects on your overall creditworthiness in a good way, as the lender can expect you to behave in the same way with their loan or line of credit.

The opposite is also true. If your payment history is marked with plenty of late payments, missed payments, and charged off accounts, the creditor can expect that you will treat their credit in the exact same way. In the lenders eyes, this means if they give you a loan, it is very unlikely that you will pay it back as agreed. Obviously this greatly harms your chances of getting a loan.

How do credit bureaus determine your payment history?

Credit bureaus build your credit history from how you deal with your past debts. Creditors, vendors, and even some service or utilities providers will report your monthly payments to the three major credit bureaus – Experian, Equifax, and Transunion. They will also include whether or not you paid on time.

There are a number of different institutions that may be sending your payment information to the credit bureaus, including:

  • Personal loan lenders

  • Auto loan lenders

  • Banking institutions

  • Credit card companies

  • Mortgage lenders

  • Department stores who have issued you a credit card

  • Stores where you have financed purchases such as furniture

  • Medical companies

While utilities bills are typically not reported to the credit bureaus, a missed payment to a utilities bill can make its way on to your credit report.

A new account you open with any of these lenders will typically begin to be reported to the credit bureau after 60 days. After that, they typically send updates once a month.

So each month these lenders send your payment information to the bureau is another month of payment history. The past 7 years of your reported payment history will be included on your credit report.

How do credit bureaus use your credit history?

Credit bureaus partly use your credit history to determine your credit score. There are other factors as well, such as the types of debts you have and how much of your available balance you use. However, your payment history is a very large piece of the equation.

During the 7 years a bit of information in your account history is active, it can have a big effect on your credit score and creditworthiness. While one late payment may not have much of an effect, a series of late payments or inconsistency paying your debts on time can greatly affect your credit score.

A number of different things count against you here, and can stay on your reports for 7 years, including:

  • Late payments

  • Charged off accounts

  • Judgments against you

  • Chapter 13 bankruptcies

  • Foreclosures

Depending how many of these items are on your credit report, this can be disastrous for your credit score.

Are all late payments the same?

All late payments are not weighted the same on your credit report. Particularly, the more recent the late payment is, the more it negatively affects your credit score. For instance, while late payments are always a negative thing, a late payment from 5 years is not as bad as a late payment from three months ago.

Older late payments simply cannot tell creditors enough about your current credit habits. A lot can happen in 5 years, and you may have completely different habits by now. So your credit score and creditworthiness should start to go up as the late payments age and you continue to make payments on time.

As an example, a person with a great general FICO score of 780 who makes one 30 day late payment could see their score drop to between 670 and 690. That is a drastic difference. However, as this late payment ages and you continue making payments on time, your scores will go back up. After 7 years, the negative mark from the late payment will drop off altogether.

With that said, even after the time limit is up on the late it may still be on your file. The credit bureaus may still report your past expired mistakes to employers paying you more than $75,000 a year or to lenders if you seek out more than $150,000 worth of credit or a life insurance policy.

Final thoughts

Payment history is the most crucial aspect of your credit reports, because it gives a direct glimpse into how you handle debts.

Building up a strong payment history can help you repair your credit scores, and late payments can greatly affect your credit scores. A strong payment history and healthy credit habits also signals to lenders that you are responsible enough to take on credit.

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