The single most important determinant of your FICO, accounting for 35 percent of your score, is your track record of paying back debt. Do you pay your bills on time? Have you always paid your bills on time? Do you pay all your bills on time? All of this matters. As far as prospective lenders go, your past is prologue. Delinquencies in paying back debt in the past, especially the recent past, will raise concerns over your future ability and/or willingness and/or discipline to pay back creditors regularly and promptly.
One or two late payments aren’t necessarily going to wreck your score if your overall history with credit reflects timely repayments. By the same token, because your entire history is factored into this portion of the score, it will take time—perhaps a year—for the ill effects of late payments to subside. So, if you’re thinking of buying a house soon or taking out a home-equity loan, make sure you improve your payment history, and therefore your score, at least a year before you start applying for mortgages.
The reality is, a majority of consumers always make at least their minimum monthly payments on time. According to Fair, Isaac, less than 40 percent of all consumers have ever been 30 days or more past due on payments. Fewer than 20 percent have ever been more than 60 days past due. Fewer than 15 percent of all consumers have been more than three months late with their payments. And less than 10 percent have ever defaulted on a loan or credit account.
All in all, this is good news. But it still means that nearly 40 percent of the population has been late at least once—at least for a short period of time. And remember, it does not matter why you were late with a payment. You could have been sick. There could have been a glitch at your bank that caused your payment not to go out. The post office could have made an error. As long as it gets reported to the credit bureaus, it will affect your score.
Even if you’re one of the 60 percent with an absolutely clean
record, keep the following in mind:
- The more accounts with no late payments, the better. You don’t have
to pay back your debts quickly or in one fell swoop to score well.
As long as you get your minimum monthly payments in on time
for mortgages, car loans, credit cards, department store cards, and
any installment loans, you should be fine. But be careful: As we
discussed earlier, credit card issuers have quietly shortened grace
periods between the time billing cycles end and when bills are due.
The average card grace period is currently only 21 days.11 So make
sure you know exactly what day and time your lender requires
monthly payments, and get those payments in beforehand.
- Time and frequency matter. The more days your payment is past
due, the worse off you’ll be. However, how recently that mistake
occurred counts too. For instance, according to Fair Isaac:
“A 60-day late payment made just a month ago will count more
than a 90-day late payment from five years ago.”