How It’s Possible to Have a Perfect Payment History and Bad CreditFive factors help determine your FICO score.

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If you want a good credit score, you must make payments on time. This often-repeated rule is more like an undeniable fact: A solid payment history is necessary for a good credit score.

Unfortunately, a perfect payment history alone doesn’t guarantee a perfect score. A number of different factors beyond payment history affect your credit score. Neglecting any one of them can leave you with a bad credit score. You can have bad credit even if you make all payments on time and have never been a day late with mortgage payments, credit card bills or car payments.

Factors That Affect Your Credit Score

The precise formula used to derive your FICO score — the most widely used credit score — remains unknown. However, Fair Isaac Corp., which generates FICO scores, has said five factors go into your score:

  • Payment history
  • Amount owed
  • Length of credit history
  • New credit
  • Types of credit used

Each factor affects your credit score to a different extent. But the key to having a good credit score is to give all five factors equal attention, as opposed to concentrating your efforts in one or two areas. Listed below are the five factors that affect your credit score, and how much they impact it.

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Payment History: 35 Percent

Payment history is the most important part of a credit score. No matter how well you do with the other four factors, you cannot have a good credit score if you have a bad payment history.

Fortunately, having a good payment history is as simple as paying your bills on time. Among other things, make sure you have no prior late payments, and no history of collections in your credit history.

Late payments fall into one of four categories: 30, 60, 90 and 120-plus days late. The later the payment, the more damage it does. All of these can do damage and should be avoided.

Amount Owed: 30 Percent

The “amounts owed” category doesn’t simply refer to the amount of money you owe on credit cards. Instead, it includes what’s known as the utilization percentage — how much of your available credit has been used.

You can get a more favorable rating in this category by decreasing the amount you owe. In other words, pay down your debt and spend less money each month. Another way to lower your utilization percentage is to raise your credit limit.

A common misconception is that you should close any credit cards that you don’t use. Ignore this widespread piece of advice. It won’t raise your score, and instead runs the risk of lowering it.

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Length of Credit History: 15 Percent

The length of time you have had credit accounts also impacts your score. This isn’t a measure of how old you are — it’s illegal to use such criteria when formulating your credit score. Instead, it’s a measure of how long on average you have had accounts open.

One of the most frustrating aspects of building credit is that you have to play a waiting game. You can’t take concrete steps that will immediately help increase your score. You can, however, take steps now that will help you in the long run.

The sooner you start opening accounts, the sooner you start building a credit history. Remember that there’s no point in closing old accounts, because such accounts actually lengthen your credit history.

New Credit: 10 Percent

New credit refers to how often you apply for new credit, and it’s a big deal due to something called inquiries. An inquiry keeps track of who pulled your credit report when you applied for new credit. Inquiries are divided into two types: hard inquiries and soft inquiries.

Hard inquiries occur when a lender examines your credit report. Such inquiries might take place when you apply for a loan, credit card or otherwise borrow money. These remain on your report for two years.

Soft inquiries occur when someone pulls your credit report for a reason other than that you applied for credit. The reissuing of a credit card might trigger a soft inquiry, for example. These remain on your report for six months.

It’s best to avoid either of these types of inquiries, as they cannot help your score. So, resist temptation and don’t open an unnecessary credit card, or apply for an unneeded loan that will put you in debt.

Related: 10 States With the Best and Worst Credit Scores

Types of Credit Used: 10 Percent

The final factor in your credit score is the types of accounts in your credit report. Three different types of credit accounts exist. To increase your credit score, you should have a mix of each.

The first type of credit is a revolving account, where the payment you’re charged each month depends on your balance. Credit cards are the most common type of revolving account.

The second type is an installment account. This type of account has a fixed payment you make for a fixed period of time. Loans are a good example of installment accounts.

The third type of credit is an open account. Like installment accounts, open accounts are due in full at the end of each month. However, like revolving accounts, they don’t feature a concrete amount that must be paid. Utility bills are an example of open accounts.

The Perfect Score Has Many Factors

It’s possible to a have perfect payment history, but still have relatively bad credit. Although a perfect payment history helps your credit score, it’s far from the only thing you have to worry about.

Five important factors figure into your credit score. Having just one perfect factor isn’t enough to guarantee a good credit score. However, having one terrible factor can be enough to get you a bad credit score.

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  • Simmions

    My credit score is really bad. I don’t know if its from my student loans being deferred or medical bills. What are some ways I can boost it up and how long will it take? I have one credit card on there but it has been almost 7 years and about to fall off, should I begin to pay on it? Is obtaining a secured credit card beneficial to boosting my credit score?

    • diane

      don’t pay anything that is about to fall off. it will restart the clock for creditors to harass you. most likely it’s the bills and not the loan. call the medical places and see if you can negotiate a pay-off amt. the business ofc may offer you a smaller pay-off amt if you will pay it in full (say you owe $90 and they offer $50) if you can afford it, take it. others will be happy enough if you pay as little as $5 a month as this will show good faith, and pay as much as you can to the smallest bills first and when they are paid, use that money to make larger pymts to the next highest bill(s). make sure they reissue amended bills and take down names and dates and keep good records of payments/conversations. it will take as long as it takes to pay off the bills to see any boost in your score. unless the secured card is from your bank–and ask if they send your payment history to the “gatekeepers”, you are better off using cash, although i understand walmart has a store card that is good for helping building back your score. obviously, don’t run up what can’t be paid in full every month. frankly, paying off (current) credit cards (and not incurring more as you pay it dwn) are the best ways to go. every five dollars counts. pick up coins and save your change and at the end of the year you will be surprised how much it adds to. don’t put it into svgs (no interest earned) and pay down a bill (lots of interest charged).

  • Bill

    If you apply for new credit your credit score takes a hit regardless of whether or not you were approved or denied due to the “hard pull” on your credit report.

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