Payment History – How Credit Scores Work
Video Transcript Below:
What’s up everyone is Derek Vogel with Credit Absolute. So this is going to be the first part of the credit knowledge and information I’m going to share with you on how the credit scores are broken down.
So the number one component of our credit score that has the biggest impact is payment history. Okay so let me show you this chart here. Alright, so what we’re looking at here is thirty-five percent, thirty percent, fifteen, ten, ten. Okay and as I told you our total score is based on five hundred fifty points. Alright, so when we break down thirty-five percent into five fifty you can then see what the total value of points is that impact our score. So payment history is 192.5. Credit cards are 165. Age of credit is 82.5. You got the proper mix of credit which is 55 points and then new credit line inquiries is 55 points which add up to the 550.
Let’s first talk about payment history I’m gonna go ahead and put this board down but a payment history alone is one of the key factors in our credibility on how we are credible and/or irresponsible enough to pay our bills on time. Now, one 30-day late payment can actually impact your score over 100 points. Okay, because it’s worth 192.5 and so whatever you do and whatever situation that you get in no matter what if you can at all possible always make the minimum payment. Okay, it’s critical because if you get a 30-day late it’s going to impact the scores dramatically and, more importantly, it takes nine months to recover from one thirty day late payment and these are on credit card accounts.
Now if it’s a mortgage late there is a little bit of longer recovery time. They say one 30-day late can take up to two years to completely recover from. Okay and then if you get multiple lates you’re talking, you know, three to five Years. Okay and then if it goes 90 days pretty much what happens is you go into what’s called T key derogatory and it takes seven years to recover from that. So it’s almost like a charge off for collection which is brutal.
Now you could have heard in the past you know just make your payments on time and your scores will be fine. Well your scores could be fine but I just want to share with you making your payments on time is not everything that you can do to have perfect credit and what I mean by that is I see quite a few of my clients that come to me that have perfect payment history, have never missed a payment and they have a low credit score like in the low 600s. Okay, the reason why is because the other 65% of the score that we talked about makes up the total 550 and it’s extremely important that that is managed properly.
All right so you can have perfect payment history again but if you have high balances, if you don’t have the proper mix of credit, if you have a young credit history, all of those things are going to factor into what I think is really cool and important which I’m going to cover a little bit more on the proper mix of credit but if you have a few accounts and not multiple then your scores will be damaged more excessively or harder because you have less credit reporting. So it’s going to have a heavier impact.
So let’s say that you have ten accounts and all those accounts have two years of perfect payment history and let’s say one of those accounts you end up getting a 30-day late payment well they’re gonna take everything and look at that and say “look well we had nine accounts with positive payment history and this one account it’s still going to have a negative impact very heavily but still it’s gonna be less of an impact because you do have credibility with those other accounts.
Now let’s use that same example let’s say that you only had three accounts and you had two of them that have a perfect payment history and you have that one get two late payments. Well obviously because you have less documentation and data that’s going to allow you to show that you’re more responsible or credible you’re going to get hit much harder if you only have those three accounts. So just know what payment history is, it’s pretty straightforward.
Okay, whatever you do try to make your payments on time and one important thing to understand is that you are not allowed to have a 30-day late report to your credit report unless you’re actually 31 days late.
Okay so on that, on that thirtieth day there are some definite things to be aware of. So like on the report it says fifty thirty-one to like sixty and so they couldn’t report a sixty day late unless you were 61 days late so it’s just you know it’s just important obviously you never want to get to that point anyways but if let’s say that you’re 15 days late you’d get a late fee but if you made the payment and it wasn’t 30 days late they can’t report a 30 day late against you so it is a big violation that we see quite a bit but with the payment history.
Again I hope this helps a little bit, helps you understand that payment history alone like I said it was 35% of the score which calculates to 192.5 but as long as you can manage your payments on a monthly basis it’s going to be one huge component to keeping your scores at the top and then part two actually we’re going to get into the credit cards which is my favorite so I’m looking forward to talking to you about that again.
Again, guys, it’s Derek with Credit Absolute and I hope this helped you today. Thank you.