How you pay your bills or your payment history represents 35 percent of the points in your credit score, which is the largest component. This is over one-third of your score. This includes both current and past payments.
But paying your bills on time won’t guarantee you a perfect score or even a high score especially if you carry large balances on multiple credit cards, apply for new credit often, have short credit history and don’t have a combination of many types of accounts. Your credit score is a combination of all these items. So while paying your bills on time is step 1 towards a great credit scores, 65% of your score “points” are determined from other categories having nothing to do with on time payments.
The other 65%
Carrying large balances
This category is “amount owed” which is how much of your available credit you have used. Available credit is the total amount owed on your credit cards compared to your total credit limit or the maximum you’re can charge. For example, the total amount owed on your credit cards is $1,000 and the total credit limit is $10,000; your utilization is 10 percent (1,000/10,000 or .1 x 100 = 10 percent). . It is best to keep that amount to minimum and even using 10 percent of your available credit is considered optimal. This contributes to 30 percent of your score.
Short credit history
Longevity of your accounts comprises 15 percent of your credit score, which gives credit grantors a history of how you have paid your bills. You need at least two years of history.
Apply for new credit
Applying for new credit can have a negative impact on your credit score and is 10 percent of your score. Credit grantors consider shopping for credit cards negative, because they think that you must need credit. Shopping for a mortgage, auto and student loan are treated differently and you aren’t penalized for the first 30 days of shopping.
Types of accounts
This category is 10 percent of your credit score. The score looks at the types of accounts you have such as installment, credit card, and mortgage. This shows you can handle many types of credit well.
Paying your bills on time will help you reach your goal of increasing your score or maintaining your high score. There are also other factors in the score, but paying your bills on time is a great start.
Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.