Credit Improvement Part 1: Your Payment History

Your payment history, also known as payment performance, is the record you’ve established by either paying or not paying your bills on time. This history is recorded on your three credit reports which reside at the three U.S credit reporting agencies: Equifax, TransUnion and Experian. Your credit reports will reflect your payment history on any credit account you’ve had in the past 7 to 10 years. This includes, but is not limited to, student loans, mortgages, bank and retail store credit cards and auto loans.

How do my credit reports know if I pay my bills
on time or not?

Simply put, they don’t. But, your lenders know whether or not you pay them on time and they will certainly report your payment history to the credit reporting agencies…good or bad. This is a process called “lender reporting” whereby your lenders will send the three credit reporting agencies the current status of your account each month via an electronic tape. Once received by the credit reporting agencies this tape is loaded and then run onto their databases thus creating an updated record of your accounts month after month.

The data that lenders report each month is generally based on the activity that occurred on that account during the previous billing period. As such, at any given time your credit reports will be displaying data that is 30-60 days old. The following components of your credit report reflect your payment history.

Your Current Status – Your current status is the rating of your accounts as of the last time they were reported to the credit reporting agencies by your creditors. The best “status” you can have on any account is “Paid As Agreed.” This means that the account is being paid according to the terms of the agreement you signed with the creditor. If your account is past due then your current status rating will reflect as such. The current status is generally displayed as a numeric value ranging from 1 to 9. If your account is paid as agreed then the rating will be a “1.” Essentially any rating other than a “1” is bad. And, as the numeric rating ascends from 2 through 9 it represents a worsening level of account delinquency.

* Your lenders are responsible for assigning and reporting the numeric status of an account. They each have policies that govern when they will start reporting a status other than 1. Some lenders will choose to be more consumer friendly and not report a status greater than 1 until the consumer becomes several months past due. Other lenders will report you with a past due status the day you become past due. It just depends on the lender’s reporting policies.

Prior Late Payments – Prior late payments are a record of any historical late payments made on an account. If, for example, you miss your auto loan payment this month you should expect to see record of this missed payment on your credit reports the next time your auto lender updates your account information with the three credit reporting agencies. If you subsequently make the payment and become “paid as agreed” on the account then your lender will change the account to show it as paid on time but with a prior late payment. If you miss a payment for two consecutive months then your lender will report two missed payments. This pattern will continue until the account is paid and marked as “current” by the lender.

As with all items on your credit reports there is a statute of limitations that governs the amount of time that late payments can continue to be reported. Prior late payments will remain on your credit report for no longer than seven years from the date they were reported. The credit reporting agencies program their systems to automatically remove prior late payments on or just prior to their seven-year anniversary. As such, there is no need for consumers to ask that they be removed.

Narrative Codes – A little known area of concern that can have a huge impact to your credit is the plain English text that describes your accounts. These are called Narrative Codes. Narrative Codes are found alongside the account listings in your credit report. There are scores of Narrative Codes with these being some of the most common:

Here they are…

• Home equity
• Real estate mortgage
• Line of Credit
• Credit Card
• Paid account / zero balance

Narrative Codes can either have a neutral or negative impact on your credit standing. The following are examples of Derogatory Narrative Codes that will have a profound negative impact on your credit reports and any credit scores that are generated from your reports.

• Charge off
• Paid Charge off
• Repossession
• Foreclosure Process Started
• Redeemed Repossession
• Settlement accepted on this account
• Account included in wage earner plan
• Account included in bankruptcy

Public Records or Collection Items – The public records as reported by the credit reporting agencies are bankruptcies, judgments and tax liens. Courthouses do not report to the credit bureaus in the same way a lender reports. Instead, the credit bureaus hire public record “vendors” to go to the courthouses and collect and verify public record information and then report it on your credit files. In the case of public records, none of them is good for your credit. Any public record that shows up on your credit file is considered negative and will impact your score significantly.

Collections are not public records but they are almost always listed in the same section of the credit report as public records. As such, that section is now almost always referred to as “Public Records or Collection Information.” Collections occur when your lenders choose to sell your past due accounts to a 3rd party company that specializes in collecting debts from consumers. Collection agencies get a fee from the lender based on a percentage of the amount they collect from you. Collections, like public records, will impact your score significantly.

The Impact to Your FICO® Credit Score

The FICO Credit Score is the standard credit scoring model used in today’s lending environment. Each of us has three different FICO scores, one generated from each of your three credit reports. It’s important to become familiar with the impact payment history has on your credit scores.

Thirty-five percent (35%) of the points that make up your FICO credit scores is based on your payment history. A full one-third of your score is determined on this category alone. This means that if you have a poor payment history then it is unlikely that your scores will be high enough to ensure competitive interest rates and optimal terms when you apply for credit. Conversely, having a solid payment history is a great first step towards earning a solid FICO score. How do you ensure earning the maximum points available out of the payment history category?

In this case it’s quite simple. Your bills must always be paid on time and reflect a “paid as agreed” status. You also cannot have any prior late payments, any derogatory narrative codes, any public records or any collections. This sounds like a lot to keep track of but it’s really not difficult. It all starts with making your payments on time. If they’re on time then the slew of negative items mentioned above can never occur.

Next…your Amount of Debt and why it’s worth almost as many points as your payment history.