Your credit score tells potential creditors how likely you are to pay your debts on time. You might assume that all the bills you pay matter in calculating your credit score: after all, why shouldn’t on-time payments of rent or utility bills be an indication of reliability? That might be a reasonable assumption, but it wouldn’t be correct. On-time payments of most bills will not affect your credit score.
Understanding how your credit score is generated will help you to understand why your bill payments don’t help your credit score, and why failing to pay your bills could hurt it.
Where Does Your Credit Score Come From?
Your credit score comes from the information contained in your credit reports. The information in these reports is processed through a scoring system to produce your credit score. Learning how to read your credit report can help you get a better understanding of your credit score.
Your credit reports are collected by three credit reporting companies: Experian, Equifax, and TransUnion. Your payment record only affects your credit score if your payments are reported to one or more of these companies.
Who Reports to the Credit Bureaus?
Reporting to credit bureaus is purely voluntary. Companies pay a monthly fee to report to a credit bureau. Reporting companies are also subject to additional regulations under the Fair Credit Reporting Act. This means they will need to have dispute resolution procedures in place and be prepared to provide documentation of accounts.
Many companies that aren’t lenders, including most utility companies, do not report to credit bureaus. They don’t want to deal with the regulatory requirements. That means that your on-time payments will not normally be reflected on your credit report or in your credit score.
Learning which payments affect your credit score and the best workarounds to improve your credit score by paying utility bills on time can help you manage your credit score better.
Do Late Payments on Utility Bills Affect Credit Scores?
Making your utility payments on time won’t generally help your credit score, but not making payments could end up hurting it. That sounds unfair, but it’s still the way it is.
👉 A few late utility payments won’t affect your credit score, for the same reason that your on-time payments won’t help it: the utility company probably doesn’t report to a credit bureau.
👉 But, if you miss several consecutive payments, your account could be sent or sold to a collection agency. Almost all collection agencies do report to credit bureaus.
⚠️ If a collection agency takes over your account, you will have a collection account on your credit report. Collection accounts have a significant negative impact on your credit score.
What About Rent and Other Recurring Expenses?
Rent and other recurring expenses—everything from your cell phone plan to your gym membership—will usually not affect your credit score. Again, the only way they will affect your credit score is if you fail to pay and your account goes to a collection agency. In most cases, rent, cell phone subscriptions and other monthly payments don’t affect your credit score.
💡 If you pay your bills with a credit card, consistently paying the credit card bill on time will improve your credit score. Credit card issuers do report and your payments do affect your credit score.
⚠️ That doesn’t mean you should pile payments onto your cards to build credit: those cards rack up significant interest if you carry a balance from month to month!
It is worth noting that many utility, phone, and cable companies do report delinquent accounts to a specialty reporting agency called the National Cable, Telecommunications, and Utilities Exchange (NCTUE). Those reports don’t affect your credit score, but if you have a bad record another company might refuse to serve you or demand a large deposit.
Can Bill Payments Boost Your Score?
Until recently there was no way to build credit through on-time utility or rent payments. That is now changing, and several companies have made moves that can help you build credit using your bill payments.
Experian and TransUnion, two of the three main credit bureaus, have services that can place some bill payments on your credit report. This can be helpful, especially for individuals with little credit history who are trying to build better credit.
These services are:
These services can apply up to two years of past bill payment history towards your credit score.
☝️ Remember that the increase will only affect your credit report from the company offering the service.
To boost your credit score with utility payments, you will sign up with either Experian BOOST™ or eCredable Lift. After signup, you link the service to your bank account and identify utility payments. Within minutes, you will receive an updated credit score. This can improve low scores or thin credit history quickly.
👉 The typical increase ranges from 2 to 15 points.
Experian BOOST™ can help you build your credit record with phone and utility payments… and it’s absolutely free!.
Lenders That Use Alternative Data
Don’t lose hope if your credit remains low. There are still ways to obtain loans from lenders who use alternative data. Alternative data help individuals with low credit or no credit qualify for a line of credit. Right now, approximately 45 million Americans have no credit history or not enough credit history to generate a score, making it difficult or impossible for them to get access to credit.
Some lenders and financial technology companies are working to combat this inequality with alternative data.
Alternative data can include:
- Utility payment history
- Rent payment history
- Cell phone payment history
- Cable TV payment history
- Deposits, withdrawals and other banking activity
- Asset ownership
- Public records
- Education or occupation
- Social media activity
- Your education or occupation
Lenders are increasingly open to alternative data as a way to serve communities and populations that have not had equal access to credit opportunities. The advantages for both lenders and borrowers include more accurate and up-to-date information, automated approval processes, faster approval, and lower cost of approval.
⚠️ Alternative data can also have unintended side effects. It does not always provide a complete picture of creditworthiness and can penalize those who move frequently.
How to Find Lenders That Use Alternative Data
You can identify a lender that uses alternative data based on the questions on their loan applications. Anything other than basic address, social security number, and credit score can indicate the use of alternative data. You can ask the lender which factors weigh most heavily in the lending decision and if they will consider alternative data.
While 65% of lenders will use some form of alternative data, the most common item used is still verification of employment and income. However, up to 25% of lenders are already looking at historical data including rental and utility payments.
Your credit score is a reflection of your overall financial health. If you make consistent, on-time payments on everything from credit cards to rental and utilities, your credit score will reflect good financial health.
Key points to remember:
👉 Missed payments on accounts that are not reported to credit bureaus may not affect your credit right away, but if your account ends up with a collection agency the impact may be significant.
👉 While paying your utility bills did not traditionally affect your credit score, you can now use it to your advantage.
👉 If you’re looking for more ways to boost your credit, try these strategies for improving your credit score.
👉 Finally, when looking for lending opportunities ask lenders if they consider alternative credit data. You can leverage your on-time utilities payments to get better lending rates, new loans and financial opportunities.