Credit Scores | Payment History

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 in order to convince lenders to lend us money and lend it to us at lower rates.

Let’s say you have a friend, Jane, who 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, who 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 a best guess on how that person will act.

In fact, according to Chase, payment history impacts overall credit score by 40%.

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 or 95 / 100 = 95%

All this to say, if you can help it, do not miss a payment.

My preferred method of ensuring I never miss a payment is to set all my credit accounts (10+) to autopay and I highly recommend everyone do this.

I regularly check my main banking account to make sure it can cover my expenses and if I happen to have a large balance that month, I’ll adjust the autopay amount as opposed to turning it off and make 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.

This post was ported over from my Substack series