Pay on Time
The single most important thing you can do to maintain or improve your credit is pay on time. If you're not on time, lenders assume that you're having problems that could lead to a default. The longer you pay on time, the better your credit will get.
Keep in mind that the goal of credit-scoring models is to predict whether or not you are likely to pay more than ninety days late. Why so much emphasis on a late payment? It's an indicator of much more serious financial trouble and potential loss to creditors. There is an easy way and a hard way to determine if somebody will pay ninety days late. The hard way: create a complex formula that runs through their credit files and spits out a likelihood of late payments. The easy way: the person lets you know by paying ninety days late.
Paying on Time Pays Dividends
Making timely payments will help your credit. According to Fair Isaac, approximately 35 percent of your FICO credit score is based on your payment history. If you can keep up with payments and avoid any delinquency items, you're helping a substantial portion of your score. Credit-scoring models look to see how many past-due items are on your report, how long since they've been reported, and how significant the dollar amounts are. If you never make a late payment, you won't have these items weighing down your score.
If you must pay late, try to get the payment in within thirty days of the due date. If you can manage this, your lenders may not report your late payment to the credit-reporting companies. If this is not possible, see if you can beat the sixty-day deadline.
Likewise, if you've got a clean payment history, it's easier to catch a break when you get into a jam. Suppose you're on vacation or you change bank accounts. The confusion could cause you to make a late payment. With a history of consistent on-time payments, this mistake won't be devastating. Your credit history will show that you've been responsible before, and you're likely to be responsible in the future.
How to Pay on Time
As with most aspects of managing your credit, you have to work a little to make sure you get your payments in on time. The easiest way to get the work done is to automate it.
Online bill-pay services can do a lot of work for you, so that you're less likely to make late payments. In their most basic form, they allow you to get your bills paid with a few mouse clicks. After that, you're done; the bill-pay service prints and mails a check. You can even schedule the payment to go out in a few weeks so that you pace yourself, or wait until you know you'll have sufficient funds in your checking account.
Keep in mind, you should always schedule your payment to arrive a week or so before the payment due date. Because you're not using your lender's preprinted envelopes and forms, they may process your payments manually, which can take more time. If you have any doubts, send a test check or call your lender to see if they'll process the payments for you.
If you want to really automate things, you can set up a system that simply pulls money from your bank account without you having to do anything. Some lenders call this an online bill pay or easy-pay system. You simply provide them with a voided check (or just your bank account number and routing information), and they get the money from your account when it's due. Of course, you have to be careful to keep sufficient funds in your bank account, and inform your lenders when you change banks.
