You pay your utility bill in full on the day it arrives in the mail. You’ve never paid a doctor’s bill late. And rent? You proudly hand your landlord a check each month well before the due date.
This should all help boost your credit score and strengthen your credit report, right?
Not quite. Here’s the unfortunate truth: Not all bills are created equal when it comes to impact on your credit. Certain on-time payments aren’t reported to the nation’s three credit bureaus: TransUnion, Equifax and Experian. So when you pay these bills on time, you’re not helping your credit score.
This doesn’t mean that you should stop paying your bills, though — while paying the bills on time doesn’t help your credit score, missing a payment could definitely hurt it.
“If you don’t make these payments and a medical provider or someone else sends your account to a collection agency, then it will show up in your credit history, and that will negatively impact your credit score,” says Anthony Sprauve, senior consumer credit specialist with FICO, the folks behind the FICO credit score.
The lesson here? Pay all your bills on time. Just don’t expect all of your good financial habits to help your credit score.
Which payments help your credit?
There are certain payments that you might make every month that may — depending on the credit bureau — have no impact on your credit score. This includes rental payments, utility bills, cell phone payments, cable bills and insurance bills.
Other payments, though, are reported all the time to all three credit bureaus. These include monthly mortgage, credit card, auto loan and student loan payments. Miss these payments, or make them late, and your credit score will suffer. Pay them on time every month and your score will improve.
Leslie Tayne, founder of Tayne Law Group PC, a New York-based law firm that specializes in debt assistance, says that many consumers will prioritize credit card bills or mortgage payments over those payments that don’t have a direct positive impact on their credit score.
“The incentive for so many people to pay their bills on time is the credit score,” Tayne says. “That is the No. 1 question I get: ‘How will this impact my credit?’ If it doesn’t impact the credit, they don’t care. They have no incentive to pay it off.”
Neglecting bills always a bad decision
This doesn’t mean that it’s ever a good financial move to skip or pay any bill late. As Sprauve says, if you are eventually sent to debt collection over something like missed medical payments or skipped insurance bills, you can expect your credit score to plummet.
Robert Wyrick, managing member with MFA Capital Advisors, a Houston-based financial planning firm, has an example. He worked with a client who had just gone through a divorce. She wanted to buy a new home, but couldn’t qualify for a mortgage loan because she had failed to pay medical bills that eventually ended up in collection. This dinged her credit enough so that her high net worth wasn’t enough to let her qualify for a mortgage.
“When you are in a tight-money environment like we are still in, having collection items on your credit report makes it really difficult to qualify for loans and additional credit,” Wyrick says.
And depending on your credit score, having an account go into collection can cause a significant drop.
Tony D’Amico, chief executive officer of The Fidato Group, said that the higher your credit score the more you may suffer should a collection notice show up on your credit report.
“Some think that if their credit score is high, the collection won’t have as much of an impact,” D’Amico says. “But it actually works the opposite way. If your credit score is high, it has a larger impact.”
There is some good news, though, for consumers who want to build their credit scores: Some of the credit bureaus have started to include rental payment histories in their credit reports to provide consumers an additional way to improve their credit scores.
Experian became the first of the bureaus to include on-time rental payment data on its credit reports. TransUnion, too, now also accepts rental data.
This is important for consumers trying to build credit if they don’t have student loan, auto loan or mortgage payments to make. According to a 2014 report, TransUnion found that eight in 10 subprime consumers — those with a low credit score — experienced a boost in their credit score just one month after their on-time rental payments were reported to TransUnion. The bureau found that nearly 41 percent of these subprime customers saw their VantageScore — a type of credit score maintained by TransUnion — increase by 10 points or more after just one month of on-time rental payments.
Credit scores are important today for consumers who want to buy a house, finance the purchase of a car or apply for credit cards. Lenders use these numbers to determine how likely consumers are to default on their payments. Those consumers with FICO credit scores under 640 will struggle to qualify for certain loans. And when they do qualify, they’ll have to pay higher interest rates.
This is why financial experts say that consumers should pay all their bills on time every month, without worrying about which payments are reported to the bureaus.