On-Time Payments Count Big in Your Credit Score

Conventional wisdom says you should always pay more than your minimum monthly payments on your credit card bills to save money, and as someone who's written about personal finance for over five years, I know how true that really is. Paying more means paying down the interest, which reduces your balance more quickly.

Unfortunately, many people can't afford to send extra money to their credit card companies every month. If you're one of them, it's critically important to make at least the minimum monthly payment due on those cards. Obviously, you'll rack up late fees if you skip payments, but there's an even bigger reason to be diligent about making those minimum payments and sending them in on time: your credit score.

A Critically Important Number

Your credit score is a three digit number that summarizes your credit worthiness. The credit bureaus all have their own formulas to calculate it, but they use the same factors. Can you guess the most important factor is out of your entire financial background? In my experience, I've found that many people have no idea, but if you said "payment history," you're right on target.

Too many consumers think that missing a payment here and there won't hurt them. Little do they know that FICO, the biggest player in the credit score industry, uses your payment history as the basis for 35 percent of your score. That's literally more than one-third of the total number.

Short and Long Term Effects

Every month that you don't make a minimum payment on one or more of your credit cards, it's noted in your credit reports. Your credit score is based on those reports, so it starts sinking. Pretty soon it's low enough to cause rejections when you apply for new credit. You'll pay higher interest to the lenders that do accept you, and you'll also pay more for insurance policies.

Those missed payments can haunt you for a long time, too. They stay on your credit reports for seven years, although their impact lessens over time. In addition to late fees, your credit card company will boost your interest rate and eventually close your account if you continue to have trouble paying.

Do What it Takes

You might have to tighten up your budget to make those credit card payments every month. I advise people to make simple changes. Pack your lunch, quit buying those lattes, and see what's on TV instead of renting a movie. It's rough to live on a bare bones budget, but it's even worse to be in a position where you can't get any new credit. Make the short term sacrifice now and reap the long term benefits of financial health.