Payment history is the number one factor that impacts your credit score. With FICO® Scores in particular, payment history makes up over one-third (35%) of your credit score.
As a result, paying bills does have the potential to help you build a solid credit history. But there is a catch to consider as well. Only certain bills can help build credit.
The following guide examines which bills could help you establish credit, and why other financial obligations might not have the same credit-building potential. Below you will also find details about what happens from a credit scoring perspective when you pay your bills late, and why building credit matters in the first place.
In the United States, the two most popular creators of credit scoring systems are FICO® and VantageScore®. The credit scoring models from each of these developers consider many different factors when calculating your credit score.
Before an account has the potential to impact your credit score for the positive or negative, it must meet certain criteria. Above all, an item must appear on your credit report with at least one of the major credit bureaus (Equifax, TransUnion, or Experian) before it can influence your credit score.
Credit scoring models do not consider information that lies outside of your credit reports. Therefore, if a creditor doesn’t report your account to at least one of the major credit bureaus, the bill and its payment history cannot help you build credit.
Credit reporting is a voluntary process. But if a lender or creditor does wish to share information with any consumer credit reporting agency, the company must follow the rules outlined in the Fair Credit Reporting Act (FCRA). Between the strict requirements of the FCRA and credit bureau policies, some creditors may decide not to report data to the credit bureaus.
An unreported account cannot help you build credit history or establish a good credit score. But some of those financial obligations still have the potential to damage your credit history if you pay late.
Certain creditors may choose to avoid monthly credit report updates, but reserve the right to report negative information to the credit bureaus. Other creditors might sell or assign your account to a third party debt collector (aka a collection agency) if you fall behind on payments. And if a collection account appears on your credit report, it could hurt your credit score.
Most mobile phone providers do not report accounts or payment history to the credit bureaus on a monthly basis. Therefore, your cell phone payments probably won’t help you build credit automatically. (Default on your cell phone payments, however, and a collection account might eventually make its way onto your credit report.)
However, there is a work around where mobile phone accounts are concerned. You may be able to add positive cell phone payment history to one of your credit reports with Experian Boost.
Experian Boost is a free service that can help you voluntarily add payment history for certain accounts to your Experian credit report. When you sign up for the service, you give Experian permission to access your online bank account. The credit bureau will then comb through your account history to look for payments to eligible creditors—mobile phone providers included. Once identified, Experian can add those positive tradelines to your credit report.
Utility bills behave much like mobile phone bills where credit scores are concerned. Most utility providers do not furnish customer data to the credit bureaus each month. Therefore, positive payment history on these accounts typically won’t build credit.
Again, if you fail to pay your utility bills, you might eventually see the debts surface on your credit reports as collection accounts. That means that utility bills may have the potential to hurt your credit rather than help it (if you pay late).
However, there are services that could help you add positive utility bill payment history to some of your credit reports. Signing up for Experian Boost can add eligible utility bills to your Experian credit report at no cost. eCredable Lift® is another option that can report up to eight of your utility accounts to TransUnion, but there is a cost involved for the service.
Insurance providers usually do not share payment information with credit reporting agencies. And since your auto insurance, health insurance, life insurance policies (and more) don’t tend to appear on your credit reports, the payments you make on these accounts cannot help you build credit. At present, there are no third-party services you can use to proactively add insurance payment data to your credit reports either.
Like other types of financial obligations, you do need to be careful to pay your insurance premiums as agreed. In rare cases, an insurance company might involve a collection agency if you stop paying your bill (though others may simply cancel your policy).
It’s worth noting that although your insurance won’t generally impact your credit, your credit can impact your insurance premiums. Good credit might save you money on auto insurance, depending on where you live.
Paying rent could help you build credit, but only if the account appears on your credit report. Not all landlords choose to report rent to the credit reporting agencies.
If a rental tradeline doesn’t show up on your credit report, you can’t ask the credit bureaus to add the account as a consumer. That’s not how credit reporting works, unfortunately. Yet you can consider paying for a third-party rent reporting service.
Rent reporting services often feature a monthly fee. But if a service can help you add positive payment history to one or more of your credit reports, the cost might be worth the potential credit improvement.
It’s also important to understand that even if rental payments do appear on your credit report, only newer credit scoring models will consider that information. If a lender uses an older credit score (such as FICO® score 8 and previous versions) those scores will not factor rent payment data into your credit score calculation.
When you visit a hospital or other healthcare provider, it’s not unusual to receive a bill in the mail afterwards. Even if you have health insurance coverage, co-pays, deductibles, and other out-of-pocket expenses can leave you owing money for the medical services you receive.
Paying legitimate medical bills that you owe is in your best interest. This action can protect you from potential collection activity such as negative credit reporting (in the form of collection accounts), lawsuits, and more. Yet you may be disappointed to learn that taking care of your medical bills probably won’t help you build credit.
If you’re struggling to afford medical bills, you’re not alone. The Kaiser Family Foundation found that 46% of insured American adults have trouble paying out-of-pocket medical costs. But ignoring unaffordable medical debts isn’t a good solution to this problem. Instead, consider reaching out to the billing department of your medical provider and ask whether a payment plan or a discount program might be available.
Unlike some of the other bills mentioned above, student loans do have the potential to help you build credit. Many private student loan providers and federal student loan servicers report student loans to the major credit bureaus. As a result, if you pay those credit obligations on time, positive payment history on student loans will likely show up on your credit reports.
Additionally, it’s important to understand that a student loan in forbearance or deferment generally does not impact your credit score. So, if you find yourself in a financial bind, these strategies could help protect your credit until you can afford to start making payments toward your student debt again.
If you’re starting from scratch, it could take up to six months to qualify for a credit score. To be eligible for some versions of the FICO® Score, you must have a tradeline (aka account) on your credit report that is at least 6 months old. Getting a VantageScore® Score may be easier, but you’ll still need at least one account on your credit report to qualify for this type of credit score.
There are a few potential ways to speed up the process. If you want to qualify for a FICO Score sooner than six months, consider the following strategies.
Making late payments can complicate your financial life in a number of ways. First, you might face late fees, loss of services, cancellation of accounts, and more, depending on the type of bill on which you fall behind.
From a credit score perspective, late payments can have a negative impact—sometimes a severe one. Yet it’s tough to predict in advance how much a late payment might damage your credit score. The degree of lateness (e.g., 30 days late, 60 days late, etc.), the frequency of late payments, and how recently the late payments on your credit report occurred can all play a role in the final credit score impact.
Building good credit can save you money and make your financial life easier to navigate in many ways. The benefits of good credit are numerous, and can include the highlights below and more.
With good credit you may find it easier to:
Building credit often requires patience. But the basic credit-building formula is simple enough to follow.
You might be able to speed up the process with an authorized user account or (to some degree) by using third-party services to report rent, utilities, and more to the credit bureaus on your behalf.
In the long run, however, it’s best to focus on managing the credit obligations you open wisely. Establishing credit and using it in a responsible manner is the best way to earn and maintain good credit over time.
Disclaimer: The Credit Builder Account and Secured credit cards links identified in this article are advertisements for Self products.
Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication. See her on LinkedIn and Twitter.
Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.
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