Does paying your bills build credit? Many people wonder if simply doing things such as paying their electricity, phone, or cable bills will improve their credit rating. Conversely, others wonder whether paying such bills late (or not at all, as the case may be) will have an effect on their credit score.
Let's address the first scenario first. Will paying your bills have an effect on your credit score?
The answer is generally no. Your regular household bills do not normally report your payments to the three credit bureaus. They do not even have a credit account open for you, as these sorts of bills are not considered a loan.
So, does that mean that not paying your bills won't hurt your credit?
When you pay a credit card bill or a loan payment at least 30 days late, your late payment is reflected on your credit report. Your "regular" bills (household bills such as electricity and gas) do not show up on your credit report, even when you pay them late.
However, not paying those items for extended periods of time can affect your credit score indirectly.
Let's pretend you have a cell phone with a carrier named "Z-Phone." You did not pay your Z-Phone bill for a few months. Z-Phone cancels your account, and they report your delinquent account to a collection agency (either a 3rd party company or their own in house or contracted collectors). Once this happens, the collection agency will usually create a "collections account" on your credit report.
Having a collection account is one of the worst things you could have on your credit report, and it is typically the end result of letting a bill go unpaid for too long. Generally speaking, you will not be referred to a collection agency until you are seriously late on a bill. How late is too late? If your utility, phone, or cable provider considers you so late that they are considering or have already closed your account, that is when you will be sent to collections.
To summarize what we've learned today, paying your bills has no direct effect on your credit. You cannot build credit by paying your electricity bill, and you won't ruin your credit by being a couple weeks late on your cell phone payment.
In order to build credit, you need to open and maintain credit accounts such as credit cards, a car loan, a mortgage, or a personal loan. Usually, if you didn't sign any loan or credit papers, the account will not be on your report.
When a credit account is on your credit report, the issuer of your loan or credit card will typically report the status of your payments every month. These monthly reported payments are what will build your credit, over time.
So if building credit is your goal, you need to get some credit cards or loans, and pay on them regularly. If you're worried about your five day late electricity bill harming your credit, don't. You can't build credit by paying your bills, and being late on your bills won't hurt your credit until you're sent to collections.
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