There are lots of ways to improve or build your credit score. And learning what they are is one of the first steps to living a healthy financial life. It’s not always easy to bump your score up by several points, but if you work hard, it is possible. So if you’ve been paying your utilities on time and you’re wondering, “does paying utilities build credit?” then we have the answers you need!
Here’s the gist:
- Your utility payments will most likely not show up on your credit report unless you fail to make them. If that’s the case, the utility company will probably report your missed payments, and your credit score could drop.
Your credit score can feel like a fickle financial burden. You always need to check it, keep track of it, and alter your financial habits to appease the credit score gods. It’s a frustrating fact that your credit score will go up and down throughout your life. It will ebb and flow throughout your financial decisions, like taking out an auto loan or mortgage, paying off your student loans, and opening new financial accounts.
If you can accept that your score won’t always be perfect, it makes life much easier. Having the financial knowledge you need to know what to expect is half the battle. Luckily, there is also a wealth of information about your credit report and credit score. And if you’re looking to boost your score, making payments on time is always a good habit.
What Is a Credit Report?
Your credit report is where it all begins. Knowing what it is and how to read a credit report is crucial. This is the document that contains most of your financial information. Several companies compile your financial data and create this report, determining your overall credit score.
Things like loan payments, opening or closing financial accounts, bankruptcies, and more can be found in your credit reports. And then, your credit scores are determined by this information.
Knowing the things that will show up on your credit report is very beneficial. This can help you plan your finances and payments accordingly. And you won’t be shocked if you see a late or missed payment show up.
These reports are one of the most critical aspects of your financial life. Just remember, the report leads to the score, and the score determines the types of rates and terms you can get. A solid credit report means a solid credit score means lower interest rates in the future.
The Three Major Credit Bureaus
So who decides what’s in your report? It mostly comes down to three companies: Experian, Equifax, and TransUnion.
These three companies are called credit bureaus. They are responsible for tracking and compiling your financial information on your report. Here’s some of the information they keep track of:
- Your payment history and on-time payments
- All of the loans you have
- Your credit card debt
- Student loan payments
- Your credit utilization ratio
- Whether you have a loan with a collection agency
- Bank account information
- Monthly bills
- Medical bills
- Your overall credit history
This can be a lot of information to keep track of. Luckily, you’re entitled to a free copy of your credit report every 12 months. All you have to do is reach out to each credit reporting agency and request it. This is a great way to get insight into your credit score by looking at your payment history, credit card payments, current, and past loans, and anything else the bureau has tracked for you.
How Is Your Credit Score Calculated?
So now that you know how all the information in your report is compiled by the major credit bureaus, it’s time to discuss how they create your credit score.
Your credit score is a collection of five different factors:
- Payment history
- Amounts you still owe
- Length of your credit history
- New credit accounts
- Credit mix
While each of the credit bureaus may have a slightly different way of calculating your credit scores, this is the FICO method, and it’s the most commonly used one.
It’s also essential to know that each of these five categories holds a different weight of importance to your overall credit score.
- Your payment history is worth 35% of your total score
- Amounts owed is worth 30%
- Length of credit history is worth 15%
- New credit accounts are worth 10%
- Credit mix is also worth 10%
As you can see, the most important thing you can do for your credit scores is to make your payments on time—all of your payments, including utility bills.
Using Your Utility Bills To Your Advantage
Since on-time payments account for so much of your credit scores, paying your bills on time is crucial.
Even though most utility companies won’t report your on-time payments to each credit bureau, they will most likely report missed payments. Kind of a terrible deal, isn’t it? You probably won’t see a boost for your good behavior, but you will get punished for the bad. Unfortunately, this is just how it works for these types of bills.
This is why paying bills on time is so important. Whether it’s for phone and utility bills, rent payments, credit card bills, or other types of payments. To keep your credit score strong, you need to pay them all on time. It’s also wise to learn more about whether paying rent builds credit.
Other Ways To Improve Your Credit
Paying your utility bills and other bills on time is step number one to maintaining a good credit score. But what are the different ways to boost your credit score? Luckily, there are several.
To figure out your best options, you just have to look at the five factors that create your score from the credit bureaus. We already know that you need to pay bills on time. The next most crucial factor would be “amounts owed.”
Amounts owed basically means any outstanding debt that you currently owe. This will include auto loans, mortgages, student loans, and more. So if you want to boost your credit score, you need to come up with a plan to start paying down your outstanding debt.
The next factor would be the “length of credit history,” which means how long you’ve utilized credit. So if you’re only 20 and didn’t have any forms of credit until you were 18, then the length of credit history is only two years. Having a more extended credit history is more favorable for your score. You can’t do much about this, but if you don’t have any forms of credit yet, you’ll want to open one as soon as possible.
The next factor is “new credit accounts.” This factor tracks how many credit cards, loans, and other accounts you open. You may see your score drop if you’re constantly opening new accounts. So be careful.
Lastly is the “credit mix.” And this is tracking the variety of accounts you currently have. In addition to good payment history, the credit bureaus want to see a varied mix of different types of accounts. Having too many of one type in your credit file, like credit cards, doesn’t look good. Mix up the types of accounts you have, and you may see that reflected on your credit reports and scores.
Building Good Financial Habits
Making your utility payments and keeping track of your utility bills is just one part of being financially responsible. There are a plethora of good financial habits you’ll want to consider to boost your credit reports and scores.
Budgeting your monthly income is one of the best ways to track and monitor your spending. This is a top financial habit that you’ll want to start practicing. This means writing down your income total and then subtracting all your monthly expenses to make sure you have enough money.
You’ll want to account for rent payments, utility payments, paying bills to lenders, and anything else you spend money on each month. If you have money left over, you have enough income, and you might even be able to start a savings account.
Making your utility payments on time might not boost your credit score, but it certainly will prevent your score from dropping. Unfortunately, we can do nothing about the utility companies not reporting good behavior. All we can do is prevent bad financial behavior from showing up in our credit file.
If you want to know more about budgeting, loans, and cash advances available online, check out the rest of the CreditNinja Dojo!
What’s In My FICO Scores? | myFICO