To build credit, you need to borrow money and make loan payments on time. The longer you do that, the better your credit will be in general. But since you also need to pay utility bills before their due date, you may wonder if paying these bills positively affects your credit scores.
It may seem like on-time payments are on-time payments, whether you’re repaying a loan or keeping the electricity on. Unfortunately, paying your utility bills typically doesn't impact your credit scores since utility companies don't report payment history to the credit bureaus. But there are some important exceptions:
- If lenders use an “alternative” credit-scoring method, utility payments can help your score.
- If you fall too far behind on utility payments, your credit will most likely suffer if accounts get transferred to collection agencies.
- Your history of utility payments can affect your ability to get other utility services.
Alternative Credit-Scoring Methods
There are different types of credit scores. But the most important is arguably the FICO credit score (and you even have several FICO credit scores—at least one for each major credit bureau). This is the score lenders typically use for significant high-dollar loans like home loans and standard auto loans.
Traditionally, the score factors in how you’ve repaid loans in the past and your current debt profile. But the credit bureaus generating those scores realize that many consumers don't have enough borrowing history to generate a credit score through conventional data points, much less a high score. That's why they've devised innovative credit-scoring methods that factor in alternative data, such as utility and rent payments. Through these methods, consumers can get credit when they make on-time payments to multiple organizations every month (for phone service, internet, cable, and electricity, for example).
For example, Experian offers Experian Boost, a service that allows consumers to get credit for on-time utility payments to increase their FICO score. You'll need to sign up for the free service online (by default, utility payments aren't factored in), share your bank account information with the bureau so that it can scan the account for utility payments, and then specify the positive payment data you want to add to your credit file to see your increased credit score.
The challenge, however, is finding a lender that uses those alternative credit scores; not all do. Even if a lender uses an alternative score, a bureau-specific service like Experian Boost won't help your score if the lender pulls your credit from another bureau such as TransUnion or Experian. The good news: Those bureaus partner with other organizations to help consumers get credit for utility payments.
Even for bureaus that offer alternative credit-scoring methods, your utility payments won't automatically get factored into your credit score. You'll generally need to sign up for the service to get the benefits.
Utility Accounts in Collections
The second way that your utility bills can affect your credit scores is if you have bills that are significantly past due.
Just like with your loan payments, paying a few days late is not likely to cause major problems (although late fees may apply). When payments are more than 30 days late, those payments will get noticed, and a utility company may turn your debt over to a collection agency if you’ve stopped making payments for several months or more. The agency will then send a record of your account to the major credit bureaus, which will make it part of your credit file and damage your credit.
What’s more, unpaid debts can evolve into legal judgments. On top of all that, you may have to pay additional fees as a result of a collection account. That may seem like an unfair deal: Utility providers can indirectly damage your credit if you don’t pay, but you don’t get any benefit (besides the service provided) for paying your bills.
While many utility companies never report positive information (that you’ve always paid on time, for example) to credit bureaus, they may indirectly lead to negative information in your credit reports. An account in collections can have a lasting negative effect on your credit since it can stay in your credit file for seven years.
Service Provider Payment History Checks
Although paying your utility bills may not directly affect your credit score, and hence, your ability to get a loan, those payments can help or hurt you in getting new utility services (if you move or otherwise need to change service providers, for example).
Similar to alternative credit-scoring methods, some utility companies track your history of utility payments to determine whether to you let you sign up for gas, water, or electricity. If you always pay on time, it will be easier to get these services.
If you have a history of paying late, it may be difficult to get service (you may need to make a deposit or obtain a "letter of guarantee" from someone willing to make payments on your behalf if you can't make them). You may even be denied service. So, depending on what a utility provider evaluates when determining whether to extend service to customers, those utility payments may indeed be important.
Building Your Credit
Since utility bills don't usually affect your credit score, it's all the more important to bolster your credit in other ways. If your credit files are thin or have negative items, there are several steps you can take to improve them and increase your score.
Monitor Your Credit
In addition to staying current on utilities, pay attention to your traditional credit data. For starters, obtain and review your credit reports regularly. Under federal law, you can get a free copy of your credit reports from each of the three major credit bureaus once a year.
Get a report from one of the three major credit bureaus every four months to catch problems before they get out of hand.
Fix Errors in Your Credit Reports
If you spot inaccurate or incomplete information in any of your credit reports, contact the credit bureau that generated the report as quickly as possible to fix them. Negative items—even erroneous ones—can drag down your scores.
Keep Paying on Time
If you’re trying to build your credit, keep making all of your utility payments on time. As described earlier, you risk damaging your credit if you fall too far behind on payments. Moreover, if you opt into a service like Experian Boost that lets you use an alternative-credit scoring method, you can get credit for on-time utility payments.
Get Current on Bills That Affect Your Credit Score
Your credit primarily depends on your history of making on-time payments on credit cards and loans. If you’re behind on these payments, get caught up to improve your credit. Granted, 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 you didn't know existed.