How Utility Bills Affect Credit History
To build credit, you need to borrow money and make your loan payments on time. The longer you do that, the better your credit will be. You also need to pay utility bills on time, and you may wonder if those payments can help you improve credit scores.
After all, on-time payments are on-time payments — it shouldn’t matter if you’re repaying a loan or keeping the electricity on. Unfortunately, paying your utility bills does not usually have any impact on your traditional credit scores. But there are some important exceptions:
- If an “alternative” credit score is used, those payments can help you get approved.
- If you fall too far behind on utility payments, your credit will most likely suffer as accounts go to collection agencies.
- Your history of utility payments can affect your ability to get other services (if you move or change service providers, for example).
Alternative Credit Scores
You have numerous credit scores. The most important credit score is the FICO credit score (and you even have several FICO credit scores — at least one for each major credit reporting agency). That score looks primarily at how you’ve repaid loans in the past and your current debt profile. It is the score that lenders typically use for significant high-dollar loans like home loans and standard auto loans. Utility payments are not currently factored into the FICO credit score.
Alternative credit scores take a different approach. The organizations developing those scores realize that many consumers do not have enough borrowing history to even generate a FICO credit score. The credit reporting agencies hardly know these people exist, but they are perfectly good candidates for loans and utility service.
These individuals and families make on-time payments to multiple organizations every month (for phone service, internet, cable, electricity, gas, water, trash, sewer, HOA dues, and more). Those payments should count for something, and new credit scores are figuring out how to identify responsible consumers and help them get loans.
The challenge is finding a lender that uses those alternative credit scores. You can expect more and more lenders to do so, and FICO scores are even evolving to include utility payments over time.
If You Don’t Pay Your Utilities
The second way that your utility bills can affect your credit scores is if you stop paying them. While many utilities never report positive information (that you’ve always paid on-time, for example), they will report negative information. When your account goes to a collection agency, the debt will be reported to the credit bureaus.
Those collection accounts certainly damage your credit. What’s more, they can turn into legal judgments against you, which are also bad for your credit scores. On top of all that, you’ll probably owe additional fees as a result of the collection account. That may seem like an unfair deal: Utility providers can damage your credit if you don’t pay, but you don’t get any benefit (besides the service provided) for paying your bills.
Those companies don’t need to be as thorough and careful as lenders — they’re not giving you thousands of dollars that you can skip out on — and they don’t want to be subject to the requirements of the Fair Credit Reporting Act (FCRA). As a result, they’ll open an account for you and provide services, and your credit only gets involved if you fall too far behind on the bills.
How far behind? Just like with your loan payments, paying a few days late is not likely to cause major problems (although late-payment fees certainly add up). When payments are more than 30 days late, those payments will get noticed, and collection agencies will only get involved when you’ve stopped making payments for several months or more.
Although your utility payments may not directly affect your ability to get a loan, those payments can help or hurt you in other areas. Similar to alternative credit scorers, some companies track your history of utility payments. If you always pay on time, it will be easier to get services.
If you have a history of paying late, it will be more difficult to get service (you may need to jump through extra hoops or make a large deposit to get service turned on). So, depending on what you mean by “credit,” those utility payments may indeed important. Here are some ways to build your credit.
Keep Paying on Time
If you’re trying to build your credit, it’s essential to keep making all of your utility payments on time. Those payments might help your traditional credit scores (it’s getting more and more likely every year) – and you risk damaging your credit if you fall too far behind on payments.
Check Your Credit
In addition to staying current on utilities, pay attention to your traditional credit data. For starters, check your credit reports regularly (it’s free under federal law). Get a report from each major credit bureau every four months, so you’ll catch problems before they get out of hand. Fix any errors in your reports, as they can unnecessarily drag down your scores.
Getting a loan and making your payments on time should help your credit scores. If you’re having a hard time getting approved, try a secured loan — even a small loan of a few hundred dollars can help. With a secured loan, you provide cash (or some other collateral) to reduce the lender’s risk. Cash is probably the best type of collateral, and a cash deposit may help you qualify for a secured credit card. The goal with a secured loan isn’t to get money — the goal is to repay the loan and build credit.
Get Help From Co-Signers
If you still can’t get approved for a small loan, somebody you know may be able to help you. A cosigner signs a loan application with you and promises to repay if you don’t make payments. That person is taking a risk by helping you (and their own credit may be affected), so it’s a huge favor to ask. Only ask that favor from somebody who:
- Has better credit than you
- Has sufficient income to help you qualify for a new loan and pay their current obligations
- Can afford to take the risk that you won’t repay (they will be 100 percent responsible for the debt if you are unable to pay for any reason — even if you’re hurt or killed in an accident)
- Understands the risks of co-signing for you
Your credit is primarily based on your history of making on-time payments on loans. If you’re behind on loan payments, get caught up — your credit will quickly improve. That may be easier said than done. If you’re struggling with debts, contact your lenders and ask if there are any programs available to help you get back on track. Being proactive may open doors that you didn't know existed.