Can Paying My Utility Bills Help Improve My Credit?
- Emerging services report utility payments to credit bureaus, potentially aiding in credit building.
- Timely payments can positively impact credit scores, while late payments can be detrimental.
- Utilizing a variety of credit types and managing credit utilization are effective for improving credit scores.
- Important factors when it comes to selecting Credit Builder Loan providers include interest rates, fees, loan terms, payment flexibility, and the lender's reporting practices.
You know that on-time payments can positively contribute to your credit score. And you pay lots of bills on time each month. . .so, theoretically, why wouldn’t those positive payments build your credit up, too?
Credit plays a major role in providing financial opportunities and flexibility to individuals and families. Having good credit opens doors to loans for big purchases like cars and homes, and even lower interest rates on credit cards. Building credit has traditionally relied on responsible use of credit cards, auto loans, mortgages, and other lines of credit that get reported to the major credit bureaus. Payment history contributes heavily to credit scores calculated by FICO and VantageScore.
Recently, fintech companies have offered opportunities to report on-time rent payments as well, providing more ways to build credit. One open question is whether regularly paying utilities, like electricity, gas, phone, internet, and cable bills can also contribute positively to credit scores. While utilities don't automatically get reported to credit bureaus like other credit accounts, new services are emerging that aggregate utility payment data and push for its inclusion in credit reports. More data could provide fuller pictures of consumer financial behavior. This blog explores the current options for building credit and the debate around including utilities as part of credit histories. Sit back, relax, and learn!
Background Understanding of Credit & Credit Scores
Credit is defined as the ability of a consumer to obtain loans or borrow money, which must be repaid at a later date. Having good credit is key to creditworthiness, which refers to how likely someone is to repay their debts.
Credit scores are calculated numbers that summarize creditworthiness and the probability of loan or debt repayment. Credit scores generated by FICO and VantageScore are the most widely used by lenders. They range from 300 to 850, with higher scores indicating better credit management and lower risk to lenders.
The main factors that influence credit scores are payment history (showing timely payments), credit utilization (keeping balances low compared to limits), length of credit history, mix of credit types (such as cards, loans, mortgages), and inquiries for new credit. Maintaining good standing across these categories leads to higher scores and greater access to affordable credit.
The Relationship Between Paying Utilities & Credit Scores
Utility payments like gas, electric, water, phone, and cable bills have not traditionally been factored into credit reports and scores. These recurring payments are handled differently than lines of credit. Utilities report customer payment information to credit bureaus inconsistently, if at all.
Though on-time utility payments help demonstrate financial responsibility, they currently have little impact on credit scores. However, new services are emerging to report timely utility payments to credit bureaus. For example, companies like RentTrack and PaymentCloud allow renters to have on-time rent reflected in their credit history.
Similarly, companies like Nova Credit and LevelCredit aggregate utility payment data and factor it into credit reports. This gives consumers more opportunities to build good credit through responsible bill payment.
However, missed or late utility payments are not directly penalized in credit scores either currently. Though no concrete credit score impact exists today, having overdue utility bills sent to collections would damage credit scores like other debts. Overall, utilities represent an area of untapped potential for credit scoring, and their inclusion could benefit those with new or poor credit.
Paying Utilities As a Credit-Building Strategy
For individuals with thin credit files or poor credit, using utility payments as a credit-building tool holds promise, but has limitations. Paying gas, electric, phone and other bills on time shows financial responsibility. However, with inconsistent utility credit reporting, these payments may not directly impact credit scores much right now.
Those with already good credit have little to gain. Those with bad credit likely need quicker results from dedicated credit repair strategies. However, startups enabling utility payment reporting give new options for credit building, especially for younger consumers with shorter histories. The effectiveness depends on the adoption of the major credit bureaus, meaning whether or not they recognize on-time utility payments reported from these start-ups as a form of credit improvement.
Comparing utility bill payments with other credit-building alternatives, getting a secured credit card or becoming an authorized user on someone else’s card may boost credit more directly.
Overall, paying utilities builds good financial habits, but is likely supplemental to proven credit score-boosting methods like maintaining low card balances and disputing errors. A mix of responsible financial behaviors is ideal for building sustainable creditworthiness.
Credit Builder Loans As Another Option
Credit builder loans offer an alternative way to build credit, especially for those with no credit or poor scores. With credit builder loans, the borrower receives the loan amount upfront in a locked savings account. The borrower makes monthly payments on the loan for a set period, usually somewhere between 6-24 months. The lender reports these on-time payments to credit bureaus, helping to establish the borrower's credit history. In the end, the borrower receives the loan payments back as a lump sum.
Credit builder loans differ from traditional loans in that the borrower doesn’t have access to the funds at first. They also differ from paying utilities in that their payment history directly boosts credit scores. For those unable to qualify for traditional credit, credit builder loans can be an effective stepping stone. By making on-time payments each month, borrowers demonstrate financial responsibility.
There are lots of benefits to utilizing credit builder loans. Here are the most common ones:
Ideal for those who have little or no credit—Credit builder loans are a bridge between poor/no credit and future credit opportunities, like car loans and credit cards. They are a direct opportunity for those who currently don’t have the best credit opportunities.
Help to grow healthy financial habits—The structured nature of credit builder loans provide a low-risk environment to prove your ability to pay back what you’ve borrowed. Since you don’t receive the funds until you’ve paid for them, there’s no room for spending it irresponsibly. Making payments on time each month allows you to cultivate healthy credit-building habits. There is also little to no risk for the lender as well, as they don’t provide the funds to the lessee until they have been paid.
In the end, they improve your credit–If payments are made on time and in full, your credit will improve! This will likely qualify you for better loan terms in the future, like lower interest rates and larger limits.
Factors to Consider When Researching Credit Builder Loan Lenders
Like anything else, not all credit builder loan lenders are the same. In order to make the best decision possible, here are the key factors we recommend researching before making your choice:
Interest Rates & Fees—Some credit builder loan lenders have little to no fees, as they know those qualifying for these types of loans likely don’t have extra money to throw at them. However, some lenders charge many different types of fees. In general, credit builder loans have higher interest rates, as they are built for those with poor or no credit histories. The interest rates will heavily affect the amount you pay overall, so do your research before signing on to make sure you can afford the monthly payment.
Loan Term Length—The loan term length of a credit builder loan is anywhere from 6-24 months. The longer the term length, the lower the monthly payment, and the shorter the term length, the higher the monthly payment. Other considerations are you may be able to save more money on interest if you chose a shorter term length, you need to be able to fit the monthly payment into your budget, and a longer term length may allow your credit score to go up more than if it were a short term length.
Amount Able To Be Borrowed—Credit builder loans often allow you to borrow $300 to $1,000, with some lenders going up to $5,000. The amount you can qualify for will depend on the lender and your financial situation. Borrowing a higher amount doesn't necessarily improve your credit faster, but gives you more capital when you receive the lump sum at the end.
Flexible Payment Options—Many credit builder loans allow you to choose the date your payments are due each month to align with your pay schedule. Options like biweekly or semi-monthly payments may be available, too. Automatic payments can make paying more convenient as well. Consider your cash flow and how often you can realistically make payments before committing.
Reputability Of Lender—Select an established lender with a track record of accurate credit bureau reporting. Online reviews and complaint records can help identify any red flags. Ensure the lender reports to all three major credit bureaus for maximum impact. Read the fine print to understand exactly how and when your payment history will be reported. Vetting the lender thoroughly on the front end will help ensure the loan builds your credit effectively.
Other Strategies For Credit Improvement:
A mix of credit types, responsible usage, and keeping an eye on your credit report all together can help to improve your creditworthiness. Having open lines of credit like credit cards, installment loans, and newly emerging utility payment history provides a diverse credit mix.
Using various credit types sparingly and making on-time payments establishes positive history. Keeping balances low compared to limits, ideally under 30%, helps credit utilization. Too many credit inquiries in a short period can hurt, so only apply for needed accounts. Managing debt responsibly by paying at least the minimums each month avoids late payments. Paying down balances also reduces utilization.
Monitoring credit reports regularly through AnnualCreditReport.com allows checking for errors and disputes. Inaccuracies like duplicated accounts or fraudulent activity can drag down credit, so addressing disputes promptly is key.
Finally, limiting new credit applications as your score improves will avoid unnecessary inquiries. Using a tailored, mix of credit strategies provides the foundation for creditworthiness.
Making Informed Credit Building Strategies
Building credit requires making informed financial decisions aligned to your needs and goals. Honestly assess your current credit status and weaknesses, whether needing to establish credit for the first time or rehabilitate poor scores.
Map credit goals like qualifying for a car loan or low-rate mortgage. Budget expenses to ensure you can commit to credit accounts responsibly. Building credit requires planning for the short and long-term. Establish an emergency fund for financial flexibility. Seek loan terms like credit builder account lengths that fit your timeline.
Be realistic–improving weak or no credit takes diligent effort over months or years, not days. Consider consulting a financial advisor like a credit counselor or advisor at a non-profit credit agency. Their guidance can provide insights tailored to your unique situation and goals. They can advise optimizing credit mix, recommend ideal accounts to start with, and help formulate timelines.
While credit building requires discipline, expert guidance provides a personalized roadmap. Make informed choices, understand tradeoffs and commit to long-term diligence to build strong, sustainable credit.
You already pay bills on time each month—why shouldn’t they be reported to credit bureaus to help improve your credit?
We explored whether paying utilities could build credit, a question relevant for establishing new credit histories. We reviewed how utilities aren’t traditionally incorporated into credit reports and scores, but that new financial services are emerging to aggregate utility payment data for credit bureau reporting. The effectiveness of utilities for credit building remains debated, though they help demonstrate financial responsibility.
We also compared utilities with other credit-building tools like credit builder loans and secured cards. For those with no or poor credit, credit builder loans allow establishing positive payment history to boost scores. However, interest rates can be high. Secured cards are also useful starter products when traditional credit is out of reach.
Overall, no single path builds credit overnight–progress requires diligently employing responsible financial behaviors over time. Consumers should understand all credit-building options and choose strategies tailored to their needs. Any tool is only as effective as the commitment to use it wisely through budgeting and making payments on time. Building sustainable creditworthiness relies first on establishing responsible money management habits, whether or not utilities play a part.
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