62% of Americans Don’t Know the Impact Payment History Has on Credit Scores

In order to maximize your credit score, you need to know how it’s calculated. According to a new study, 62% of Americans do not know that payment history is the most important credit scoring factor. In other words, paying your bills on time each month has more impact than any other effort you make to boost your credit.

Credit scores are comprised of five factors, each with its own weight in the equation. Payment history makes up 35% of your credit score, followed by credit utilization (30%), length of credit history (15%), diversity of credit (10%) and new credit (10%). Credit utilization refers to the ratio of debt you have compared to the amount of credit available to you.

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Sixteen percent of survey respondents falsely believed that debt-to-income ratio was a credit scoring factor. Your monthly debt-to-income may influence whether a lender approves you for a line of credit, but it does not impact your actual credit score. Income plays no role in the credit scoring equation.

Another myth about credit scores is that paying off your debt too quickly may damage your score. Nearly one-third of respondents (32%) said they had avoided debt payoff for fear of hurting their score. While there is merit in maintaining long credit history, paying off a debt will not decrease your credit score.

If you are among the 56% of Americans who are actively trying to improve their credit scores, start by evaluating your existing debt. What could you pay off quickly to improve your credit utilization and free up money in your budget? Don’t close a credit card after paying it off. Leave it open to preserve your length of credit history and amount of available credit. Set calendar reminders if you struggle to make on-time payments, and frequently monitor your credit score. Checking your own score will not hurt your credit, so you can actively keep track of your improvements.