When you apply for credit, such as a credit card, loan or mortgage, lenders look at your credit file. But until now, it’s been hard to find out what exactly they are looking for; your credit score doesn’t give you the information you need, and lenders don’t use it either. Payment history is a major factor lenders consider when deciding to lend you money.
So why is this so important to them, and what can you do to build a good payment history? Read on to find out why your payment history really matters, and how Credibble can help.
Table of Contents
What is a Payment History?
Your payment history is pretty much what it says on the tin. It is a six-year record of your payments towards credit or important bills. This includes mobile contracts, utility bills, credit cards, mortgages, and loans. Even leases, mail orders and monthly insurance plans count. Lenders will gain this data from your credit file held by credit reference agencies.
Why do lenders care?
When they decide whether to lend you money, what lenders need to know is one simple thing: how risky are you as a borrower? They need to be sure that you can pay back what you owe. To assess this risk, they will use information from your credit file to see how you stack up against their criteria. Your payment history acts as proof of how well you make payments on time. A positive history shows that you are good at repaying your debts. By contrast, a history of missing or late payments suggests that you’ll probably do the same in the future.
It doesn’t matter how strong your word is or that you’ve never needed to borrow. Without a history of making payments, lenders can’t tell how likely it is you’ll repay your debts on time. Unless you’re a Lannister, of course!
What this means for you
Your payment history is important because it means your day-to-day money management can affect how lenders see you. Missing a payment on your credit card, or paying late for your phone bill, can damage your credit. In other words, you need to stay on top of payments to be in the best shape to borrow money. Plus, a better payment history could help you access better rates of interest, making borrowing more affordable, whenever you may need it.
A closer look at your payments
In terms of missed payments, lenders will check to see how many, if any, you have in the past 12 months (but this can go up to three years). Lots of recently missed payments is a bad look. It can have a serious impact on whether you get accepted for credit. Even if you’re accepted, you’ll be charged higher rates of interest to cover your risky behaviour. The more time that’s passed since you missed a payment, the better. So, if you’ve missed a payment, you’ll look better to lenders if you wait until this stain on your credit file has had time to fade.
Not all credit is created equal and some payment histories pack a stronger punch than others. For example, people with a mortgage are the most trusted type of borrower. So, if you have a mortgage, it’s vital you keep up with these payments. Missing such an impactful payment can break your chances of borrowing in the future.
Many people assume their telecoms accounts, such as mobile contracts, don’t appear on their credit file. This is certainly not the case. Keeping on top of your mobile phone bill is important; missing payments, even for this, can be a sign to lenders that you’re not responsible with your money or suffering with financial difficulties. Not a good look.
How good is your payment history? Find out with a Credibble account for less than £10 a month.
Last updated by Robert Edwards, May 2022