Pay your utility bill on time every month? Never miss a rent payment? Those are both smart financial moves, but here's the downside: Neither of those sound habits will improve your credit score, and they're not the only ones.
Many of the timely payments you make each month may offer no benefit to your credit score. While this doesn't mean that you should begin neglecting your utility bills, it does mean that the payments you prioritize each month can affect your credit in unexpected ways.
Scott Shellady, vice president of the Trean Group, a Chicago-based brokerage, says it's unfair that many on-time payments don't help consumers' credit.
Many consumers pay their electricity and water bills on time every month, even when they are struggling financially, because they don't want these services cut off. They might, however, choose to skip a mortgage payment because it can take a far longer time for the full consequences -- a foreclosure -- of missing this payment to occur.
The result? These consumers' credit suffers for the missed mortgage payment, but receives no boost for the on-time utility payments.
"They might pay 80 percent of their bills on time every month," Shellady says of people in this situation. "But that doesn't show up in their credit score. Instead what does show up is that they missed a mortgage payment. That's unfortunate. There should be some positive result for paying bills such as utility and water bills on time each month."
Unfortunately, many of the bills that you pay each month won't help your credit score at all -- though some of them can do the opposite if you fall into delinquency.
The high cost of a low score
Mortgage lenders rely on your credit scores to determine whether you qualify for a mortgage loan and what interest rate you'll pay on it. Similarly, a low credit score might make it impossible to qualify for an auto loan. Some insurance companies also use credit scores to help set the price of your policy. Some employers might even pass on your resume if your credit score is too low.
Today, many lenders agree that FICO credit scores of 740 or higher are considered excellent. On the other hand, FICO scores of 620 or less can make it tough to qualify for a mortgage loan at a reasonable interest rate.
While the general formula for maintaining a high credit score is deceptively simple -- pay your bills on time and wisely manage your loan balances -- not all bills are held in equal esteem by the nation's three major credit bureaus (TransUnion, Experian and Equifax). Payments for these bills aren't reported to the bureaus and thus cannot boost your credit score:
- Utility bills
- Insurance bills
- Cell phone bills
- Rent bills
Again, this doesn't mean that skipping these payments is a good idea. If you fall behind on your rent, utility bills or cell phone payments, a collection agency might report your delinquent accounts to the credit bureaus, and that could cause your credit score to drop.
In other words, while paying these bills on time won't help your credit, falling behind on them can hurt it.
Jack Bosch, president of Orbit Investments in Phoenix and author of the financial-planning book "Forever Cash," says that consumers who pay their bills on time -- without worrying about which bills are reported to the credit bureaus and which aren't -- tend to have stronger credit scores than those who do not.
"I always tell people to pay their bills on time because of the theory that however you do anything, you do everything," Bosch says. "If you get into the habit of paying everything on time, then you'll generally do fine with your credit score. If people pay their bills on time, they are generally reliable in other financial areas too. There is a relationship between paying bills and having a strong credit score, definitely."
Other credit curiosities
There are other surprising financial factors that don't impact your credit score. Your credit score will not rise or fall depending on how much money you make. Your salary is not reported to the credit bureaus and does not appear on your credit report. Criminal convictions also won't negatively impact your score.
Have you taken out payday or title loans? As long as you paid them back on time, they won't lower your credit score. You also won't see your score fall if you're paying back student loans. But again, this only holds true if you pay back these loans on time.
"Sometimes people are surprised at what isn't included in their credit score," Bosch says. "But I always tell them not to worry about which bills count and which don't. Pay them all and you'll be in good shape."