How It’s Possible to Have a Perfect Payment History and Bad Credit

Once I reviewed a study that suggested that the contents of credit reports are predictable according to your credit ratings. It is complicated, but the argument was that all credit reports with scores of 500, 600, and 700 (or any other score) look similar. It was really an angle of all 600 is created equal. This assumption is mostly incorrect, as there are various paths for most scores close to and above 550. This is just because credit rating processes are multivariate, which means that they evaluate a lot of information when calculating a credit rating and that no factor determines a good or bad rating. That means that different combinations of credit reporting data can lead to similar scores, which brings me to the key point.

Good Credit Does Not Equal Good Credit Scores

Contributing factors and their weight vary according to the credit bureau; here is a breakdown of the elements included in a Vantage 3.0 score:

  1. Payment history: Payment behavior (delinquent, satisfactory, derogatory).
  2. % of the credit limit used: Proportion of the amount of credit used/owned in the accounts.
  3. Balances: Total amount of balances reported recently.
  4. Age and type of credit: Duration of credit history and kinds of credit.
  5. Recent credit: Number of opened credit accounts and credit inquiries recently.
  6. Available credit: Amount of available credit.

Most common mistakes people make once it comes to credit rating is that they consider you have good credit whenever you make your payments on time. That is a great first step. However, if you think that payments on time amount to a large credit score, you’re wrong.

I Have Never Missed a Payment

This is maybe the most appalling of all my scenarios. Your credit rating may be as low as 575 without having lost a payment. Keep in mind that by making all your payments on time and avoid other derogatory credit reports, you only earn 35% of the points on your rating. Staying behind in the other 4 categories referenced above fast precipitates your ratings to a range where you would expect to see certain derogatory credit information.

I Have No Debt

Not having a debt is excellent, but you may still have a score as low as 535, particularly if your credit ratings are loaded with negative information. This result dispels the myth that credit scores are based on your debt preached by some popular personal finance gurus. Check here.

I Have Never Lost a Payment and I Do Not Have Debts

This appears to be the best of both worlds, but keep in mind that these two categories still do not take into account all the points in your ratings. You can get a score as low as 695 that you have never lost a payment and do not have a penny of debt on your credit scores.

You have to perform very well in all credit rating categories to get an excellent credit rating, but you just have to fall behind in one of the main categories to possibly ruin your score. The examples provided are obviously the most unfavorable scenarios and there are thousands of different combinations that can get a score between 700 and 800. Thus, even though you may not have large credit scores with poor credit, you can clearly have bad credit scores with good credit.