Do Utility Payments Help Build Credit?

Credit building involves establishing a financial record that demonstrates responsible borrowing and repayment. Lenders use this record to assess financial trustworthiness. While many financial activities contribute to this record, the direct impact of utility payments on building a credit history is often misunderstood. For most traditional credit reporting, these payments do not directly improve credit scores, though specific exceptions and indirect benefits exist.

Understanding Credit Score Factors

Credit scores are numerical representations of an individual’s creditworthiness, influenced by several categories of financial behavior. Payment history is a significant factor, reflecting whether bills are paid on time. This category generally accounts for approximately 35% of a typical credit score.

Amounts owed, or credit utilization, represents the percentage of available credit currently being used. Keeping this utilization low, ideally below 30%, is beneficial and accounts for around 30% of the score. The length of one’s credit history also plays a role, contributing about 15% to the score.

The types of credit used, or credit mix, and new credit applications make up the remaining score portions, each contributing around 10%. Credit mix refers to a blend of different credit types, such as installment loans and revolving credit. New credit inquiries can temporarily lower a score, especially if multiple applications are made within a short period. These factors consider accounts reported by traditional lenders, like banks or credit card companies, to major credit bureaus.

How Utility Payments are Reported

Most utility companies, including providers of electricity, natural gas, water, internet, and mobile phone services, do not report positive payment histories to the three major consumer credit bureaus: Experian, Equifax, and TransUnion. This stems from their operational model; they are service providers, not traditional financial lenders. Their business is to provide services and collect payments, not to assess or report consumer credit behavior for scoring.

While positive payments are rarely reported, severe delinquency changes the scenario. If a utility bill goes unpaid for 90 days or more, the company may sell the debt to a third-party collection agency. Once sent to collections, or if the utility company directly reports delinquency, this negative information can be reported to credit bureaus. Such negative marks can damage a credit score, remaining on a credit report for up to seven years.

Emerging exceptions exist, such as Experian Boost. This service allows consumers to include positive payment data from utility, telecom, and streaming services in their Experian credit report. By linking bank accounts, the service identifies and adds qualifying on-time payments, factored into the Experian FICO Score 8. However, this only impacts scores calculated using Experian data and may not affect scores from other bureaus or different models.

Alternative Ways to Build Credit

Since utility payments do not build a positive credit history, individuals seeking to establish or improve their credit can explore several alternatives. One common method is obtaining a secured credit card, which requires a cash deposit that serves as the credit limit. This deposit minimizes issuer risk, making cards accessible to those with limited or no credit history. Regular on-time payments and low credit utilization on a secured card are reported to credit bureaus, directly contributing to a positive payment history.

Another strategy involves a credit-builder loan, offered by credit unions and community banks. With this type of loan, the borrowed amount is held in a locked savings account or certificate of deposit while the borrower makes installment payments over six to 24 months. Once the loan is fully repaid, the money is released to the borrower. Each on-time payment is reported to credit bureaus, demonstrating responsible repayment behavior and building a positive credit history.

Becoming an authorized user on another’s credit card account can also help build credit, provided the primary account holder maintains a positive payment history. As an authorized user, the account’s payment activity is reported on the authorized user’s credit report. This method offers a way to benefit from another’s good credit habits without direct account responsibility. Individuals should ensure the primary user is financially responsible and makes payments consistently.

Considering rent payment reporting services is another option, as they allow on-time rent payments to be reported to credit bureaus. While distinct from utility reporting, these services function similarly by adding a regular, otherwise unreported payment to a credit file. This can be beneficial for individuals whose largest monthly payment is rent, turning a routine expense into a credit-building asset.