On-Time Payment: The Most Important Thing You Can Do for Your Credit Score

Because credit scores are so important in the world of finances, many are interested in figuring out how they can improve their scores. Credit scores represent your financial reputation, and poor financial reputation can result in paying more in interest or paying higher insurance premiums — or being rejected for some financial products and services altogether. There are a number of agencies and others that claim they can help you “fix” your credit score. However, the most important thing you can do for your credit score is to make on-time payments.

Your Payment History and Your Credit Score

Because your credit score is meant to be a measure of your credit habits, it is not surprising that your payment history is the most important factor considered in credit scoring models. Indeed, according to FICO, the company that is most prominent in credit scoring, your payment history accounts for 35% of your score. Your credit utilization accounts for 30% of the score and is next in importance to your payment history.

When you make a late payment, the creditor reports this to at least one credit bureau. Your payments are recorded as 30 days, 60 days, 90 days late and beyond. If a creditor writes off your debt or sends your information to a collection agency, that is reported as well. Your payment history then impacts your entire credit score, figuring prominently enough to offer a major hit to your credit rating if you develop a history of late payments. Even partial payments made on time can negatively impact your credit score.

Non-Credit Payments and Your Credit Score

It makes sense that credit payments, such as those on credit cards, auto loans and home mortgages, should impact your credit score significantly. But what about non-credit payments? Can you ignore bills like those sent by cell phone and utility companies? The truth is that anyone who collects money from you can report on your payment habits to a credit bureau. While a utility company might wait a few months before reporting your tardiness to a credit agency, it is still likely to happen — especially if you make late and partial payments a habit.

Your credit score can be impacted even more if the service provider decides to turn the account over to a collections agency. When my husband and I moved from New York, our final bill from the power company got lost in the shuffle. It didn’t even occur to me that it needed to be paid. Until a year later. We got a call from a collections agency asking for payment. Suddenly, what I thought was an inexplicable drop in my credit score became clear. Even though it wasn’t a credit account, the accidental non-payment of a utility bill had an effect on my credit score.

Making Payments on Time

Because making on-time payments is such an important part of your credit score, it is vital that you do what you can to make those payments on time. Many credit cards offer the option to schedule payments online, allowing you to ensure that money is automatically transferred from your bank account to your credit card account on time. Auto loans and mortgages can usually be set up for automatic withdrawal. Even utility payments can be made via automatic withdrawal in some cases.

If you are uncomfortable with that level of automatization in your finances, you can keep a calendar, or have reminder emails sent to your account or text alerts sent to your phone to remind you to pay your bills. If you are interested in maintaining a good financial reputation through your credit score, you will need to make your payments on time.