Payment history is a significant factor used when lenders calculate your credit score. This metric accounts for 35% of the calculation, more weight than other factors like the amount owed or length of credit history.
It might be easy to assume that any payments you make a difference. For example, you may wonder if paying utility bills affects your credit score. While utilities are technically a form of debt because you owe your provider, the effect on your credit score is not as straightforward as it seems. In this article, we decipher how utility bills affect your credit score, and what you can do about it. Let’s dig in!
Do utility companies report to credit bureaus?
Utility companies usually shy away from reporting accounts and payment history to credit bureaus. Reporting to credit bureaus is actually expensive. In addition, reporting to credit agencies makes the utility company subject to the Fair Credit Reporting Act, and most don’t want that liability.
Being late on utility payments by a few days does not affect your credit score, though you could be charged late fees. If you fall behind on your payments by as much as 30 days, your account can report the account as delinquent, and your debt would be transferred to collection agencies.
What happens if your utility accounts go to collections?
A utility bill sent to collections will impact your credit score. Like any other delinquent account, the debt can stay on your credit report for up to seven years, even if you’ve paid the bill.
If you need a loan within this period, lenders would know that you defaulted on paying your utilities when they access your credit report. This would send red flags to lenders, making it difficult for you to obtain a loan at favorable rates.
Does paying utilities build credit?
Leaving your utility bills unpaid for a period can negatively affect your credit score, especially if the utility company decides to transfer your account to a collection agency. Ironically, paying your utilities (promptly) does not always boost your credit score.
A credit score is a metric used to assess your creditworthiness – the probability of you paying back a loan. Since they are not loans, paying utility bills does not build your credit score. Also since utility companies are not obliged to report payment history, your early payments would go unnoticed by the credit bureaus.
Other tips to build your credit
Make payments on-time
Paying your bills on time is one of the best ways to build your credit. Credit scoring models like VanatageScore and FICO use payment history as a factor when calculating your credit scores. On-time payments also tell lenders that you are financially responsible and capable of repaying your loans.
Try to pay more than the minimum payment
Monthly payments do not directly affect your credit score, but they do your credit utilization ratio. Your credit utilization ratio is calculated by dividing your credit card balance by your credit card limit. This is calculated by dividing your credit card balance by your available credit.
Paying above the required minimum amount lowers your credit utilization ratio, which improves your credit score. When you only make the minimum payment, you’re only slightly lowering your balance each month. A high credit utilization ratio lowers your credit score. Experts recommend keeping your credit card utilization rate below 30 percent.
Monitor your credit
Monitoring your credit report helps you stay informed and aware of the information your creditors are reporting. You can track your score by obtaining a free copy of your credit score. Since the law permits you a free report from each of the three credit bureaus once a year, you can obtain a report once every four months. The benefit of tracking your credit is that it allows you to take preemptive steps to boost your credit score if you notice that you are losing points.
Fix any mistakes on your credit report
Mistakes can appear on your credit report. Errors could impact your credit score and your ability to obtain a loan at a favorable rate.
If you spot inaccurate or false information in any of your credit reports, contact the credit bureau responsible for the report either online or by phone as quickly as possible. Gather any supporting evidence that would help your case and expedite the correction process.
Negotiate a debt repayment plan
If you can’t pay off all your debt at once, try to set up a repayment plan with the company you owe or the collection agency. If you can afford a lump sum payment, collection agencies often agree to reach a compromise.
Paying On Time Builds Habits
Utility bills can indirectly hurt your credit score. Paying utility bills on time each month doesn’t always boost your credit score, but late payments can lower it.
If you’re applying for a loan, lenders review your credit report and other factors, such as your income to determine your eligibility. Your utility bills might not help improve your credit score, but paying them on time builds good money management habits.
Do electric bills affect credit score?
Electric bill payment history can affect your credit score when you’re late and in cases of default.
Do late utility payments affect credit?
Yes. If turned over to a collection agency, the bill is reported as a delinquent account and will have a negative impact on the score.
Do utility bills build credit?
No, paying utility bills does not build credit.
Anna Yen Anna Yen, CFA, has nearly 2 decades of experience in financial markets, primarily with JPMorgan and UBS. Currently, she manages digital assets and her goal at FamilyFI is to empower families with financial literacy. She’s worked in 5 countries and visited 57.
