Credit Tips - First Leg: Payment History
January 13th, 2009 | by DebtGOTOGuy.com |If credit is like a three-legged stool, then the first leg of your credit is your “payment history.”
Payment history is simply a record of how well you’ve made your payments; if you’ve been on time or if you’ve ever been late. Payment history is the most common factor people think of in regards to keeping or maintaining their credit. It is important, but it’s only 30-35% of your score, “about a third”.
There are two characteristics of your payment history you need to know:
The first characteristic of your payment history is that “time is your friend”. This works both ways, for good credit and bad credit. The longer you’ve had a good payment history, the better it is for your credit. Thus, an account in good standing for several years will help your credit more than a new account with minimal history. While most negative marks such as late payments will remain on your credit report for seven years, their affect on your credit score will lessen over time, because, “time is your friend”. Late payments in the past few months are going to be much more severe than from a few years ago. As time goes by these negative items will affect you less and less until they drop off of your report at the end of seven years.
The second characteristic of payment history is IF you have never missed a payment and have a “perfect payment history”, then you’re in great shape. You have something to lose in this area of your credit and should keep this in mind.
However, the unfortunate reality seems to be that missing even one payment by 30 days knocks your credit score right out of the sky. It’s as if the very first negative item on a credit report knocks the wind right out of your sails. My clients report a drop of 100 points or more after missing a single payment.
The first late payment has the most severe negative affect on your credit. Once you’ve taken this initial hit, most of the damage is done. Additional late payments seem to have less and less of a negative effect, meaning the more negative items you get, the less of a negative affect they each have because most of the damage is done by the very first ding.
It makes sense when you realize lenders are in the business of making money by charging interest. The higher the interest they charge, the more money they make (as long as the debt is repaid). So they’re quick to justify charging higher interest as soon as you give them any reason to do so.
Keep these characteristics of payment history in mind as we go through your options to get out of debt.
Shattering a common MYTH
A lot of times people ask, “If I get a bad payment history, will it ruin my credit forever?”
No, that’s not true at all. Having late payments, collection accounts, charge offs, etc will not ruin your credit forever.
Take a look at folks who have filed bankruptcy in the past few years. Until October 2005, when the laws changed, record numbers of people were filing bankruptcy every year. In fact, more people filed bankruptcy in 2003-2005 than any other time in history, including during the great depression. So there’s a lot of people out there who filed bankruptcy in the past five years or so.
What’s strange is that even though these folks filed bankruptcy (the ultimate financial failure sitting there on their credit report for the whole world to see, severely damaging their payment history), many are able to get new credit, home loans, car loans and low interest credit cards WITHIN JUST A YEAR OR TWO after filing bankruptcy. (Sometimes even from the same creditors they filed bankruptcy with!?!)
Why is that? How does that happen if they just filed bankruptcy?
One factor is that after filing for Chapter 7 bankruptcy, there’s a period of time (seven years) before a person can file again.
The biggest reason, however, is if someone doesn’t owe any more debt, then all of their money is freed up every month to pay for new credit. Even though their payment history may have taken a severe hit from a bankruptcy, they can still get new credit because payment history is not the whole picture… there’s more to the credit puzzle!
Of course, less severe negative credit entries such as late payments, collections and charge-offs accounts are not nearly as bad a bankruptcy once the debts show a zero balance.
So even if you already have a bad payment history don’t despair, because it isn’t going to ruin your credit forever. Staying in debt is the real problem. There are a couple other credit factors you may be able to do something about to get back on track quickly.
After we finish looking at the three legged stool we’ll also look at how to repair a damaged payment history and how to rebuild a new good payment history. But first you need to know the other two-thirds of the puzzle.
So that’s “payment history”, the first leg on this three-legged stool. Again, a very important factor but it’s not everything because payment history only makes up about one-third of your credit score or credit “worthiness”.
Now let’s look at the rest of the story - the other two-thirds of the credit puzzle…
>>> NEXT: Second Leg: Debt-To-Income Ratio
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Jesse Niesen
DebtGOTOGuy.com
Debt Relief Guide Online
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Tags: Credit, Credit Repair, credit report, credit score, fix credit
