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Because Life’s Not Fair: These Monthly Bills Can Only Hurt (Not Help) Your Credit

June 16, 2014
Credit Score, Personal Finance
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We all learned in grade school that life’s not fair, but many grown-ups have a tough time dealing with this reality. In fact, the adult world brings a lot of new opportunities to get dealt a crummy hand.

For instance, if you’re trying to build your credit, you might be frustrated to learn that paying certain bills won’t help your score. But not paying those same bills will definitely hurt it. Talk about unfair! Luckily, the Nerds are here to help you sort this out. Take a look at the details below for more information.

Credit versus non-credit payments

When you’re trying to figure out which bills will help your credit score and which will only hurt it, it’s important to distinguish between credit and non-credit bill payments:

  • Credit payments are those that you make on a recurring basis to repay a loan. For example, your monthly mortgage payment is a credit payment.
  • Non-credit payments are bills that you pay every month for a service. You haven’t borrowed money exactly, but you have used something for which you owe money. Your electric bill is a good example of a non-credit payment.

Bills that can only hurt (not help) your credit

Generally speaking, credit payments are regularly reported to the three major credit bureaus. As a result, the on-time and in-full monthly payments you make on your credit accounts are likely helping your credit score climb. There are exceptions, (see our Nerd note below) but this is a good rule-of-thumb to keep in mind.

On the other hand, the on-time and in-full payments you’re making on your non-credit bills probably aren’t helping your credit score. Unlike banks and credit unions, most utility companies, landlords, and doctor’s offices don’t report to the three major credit bureaus. Doing so would be costly and time-consuming, which is why most companies that aren’t directly lending money to their clients don’t bother.

However, if you don’t make your monthly non-credit payments, your credit is likely to suffer. After months of non-payment, your service provider will give up trying to get the money from you and your account will probably be sold to a collections agency. At this point, it will show up on your credit report as such. This will do serious damage to your credit, especially if your score was high to begin with.

So which bills have the potential to hurt (but not help) your credit? Here are a few examples:

  • Rent payments
  • Water bills
  • Gas bills
  • Electric bills
  • Cable bills
  • Cell phone bills
  • Medical bills
  • Tax bills

Nerd note: Although it’s true that most monthly credit payments are reported to the credit rating agencies, be aware that this a totally voluntary action on the part of your lender. If you’re trying to rebuild your credit, don’t take on a new loan or credit card until you’ve verified that your payments will be reported.

How to score high, no matter what types of bills are rolling in

It might seem unfair that some payments can do a lot to damage your credit and nothing to help it, but c’est la vie. To work within this system effectively, use the Nerds’ tips below:

  • Pay your bills on time – No matter which type of bill you’re dealing with, paying on time is the best thing you can do for your credit score.
  • Keep your credit utilization as low as possible – Your credit card balance has a big impact on your credit score. Keep your credit utilization below 30% at all times.
  • Check your credit report frequentlyMistakes happen, so reviewing your credit report a couple of times per year is a good way to make sure the information on your report is accurate.
  • Establish credit as soon as you can – As the information above proves, setting up a utility account in your name isn’t enough to start establishing credit. Open a credit card or loan in your name as soon as possible, because the length of your credit history accounts for 15% of your score.
  • Don’t apply for too much credit at once – Every new credit application dings your score and too many applications in a short period of time could result in a big loss of points. Only apply for credit when you really need it.

The takeaway: Certain bills have the potential to really hurt your credit score if they go unpaid, but won’t do anything to boost it when you pay responsibly. Don’t let this unfair reality drag you down – use the Nerds tips to keep your score in shape!

Unfair image via Shutterstock