We all make mistakes. We order a regular soda instead of diet, we get a regrettable tattoo, and we miss a car payment. So, choke down some high fructose corn syrup, find the humor in the bright, new Mighty Mouse tattoo, and know that someday that blemish on your credit report will go away.
While credit reporting practices and scoring methods differ depending on the creditor, potential lender, and credit bureau, payment history is always one of the primary factors in a credit score. In FICO (Fair Isaac Corporation) scoring, payment history is weighted at a hefty 35% of a credit score, which is more significant than any other factor. In the VantageScore calculation used by the top three credit bureaus (TransUnion, Equifax, and Experian), the exact formula is a black box, but we know payment history is weighted in the 30% range and is again more important than other factors. Specific industries – like the mortgage industry and the automobile industry – have their own algorithms for credit scoring, but most use either the FICO or VantageScore as a starting point.
There are components of payment history that range from amount past due on an account to frequency and severity of payment tardiness to liens and court judgments. The weight of these factors on the payment history varies, since some creditors report immediately, some report based on a 2-3 rolling period, and some don’t report at all. To further complicate matters, some calculations look at the full seven years of credit history (FICO) and others at shorter periods like two years (VantageScore).
At Ovation, we advise our clients to assume all financial information will affect credit scores for seven years. Thus, all of us would do well to treat our credit score like our reputation or identity and take very good care of it. Tools like automatic bank payments can help to ensure our financial commitments are met on time. If a payment is missed, don’t wait to bring the account into good standing.
Credit scoring is confusing and complicated and sometimes frustrating for consumers. While the weight of a financial blemish is beyond our control, the blemish itself is well within our control – The easiest way to take control of our financial reputation and keep a solid credit score is to live within our means and make our payments on time. If a payment is missed, at least the ramifications are shorter term than impulsive ink!