Does Paying Your Bills on Time Build Credit?
Understand which bill payments genuinely build credit and how to effectively improve your financial standing.
A credit score is a numerical representation of an individual’s creditworthiness, influencing the ability to secure loans, obtain credit cards, and even rent an apartment. Understanding how bill payments contribute to this score is key to financial health.
Payment History and Your Credit Score
Payment history is the most influential factor in calculating a credit score, accounting for approximately 35% of the FICO Score. Consistently making payments on time demonstrates reliability to lenders, signaling a lower risk of future defaults. Lenders report payment activities on credit accounts to the three major credit bureaus: Equifax, Experian, and TransUnion.
Late or missed payments can significantly harm a credit score. A payment is reported as late to credit bureaus once it is 30 days or more past its due date. The negative impact increases with the length of the delinquency, such as a 60-day or 90-day late payment. These marks can remain on a credit report for up to seven years from the original delinquency date. Even if a late payment is brought current, its presence on the report can continue to affect the score, though its impact diminishes over time.
Types of Payments and Credit Impact
Not all bill payments directly contribute to building a credit history. Payments made on traditional credit accounts are the primary drivers. These include revolving credit, such as credit card payments, and installment loans like auto, mortgage, and student loan payments. Lenders for these accounts routinely report payment activity to credit bureaus.
Regular payments for non-credit accounts, such as utility bills and rent, do not appear on credit reports and do not directly build credit. However, if these accounts become delinquent and are sent to a collection agency, they can be reported to credit bureaus. A collection account can negatively impact a credit score. Some services, such as Experian Boost, offer an optional way to include qualifying on-time utility and rent payments in an Experian credit report, which can increase a credit score.
Other Influences on Your Credit Score
While payment history is most important, several other factors contribute to a credit score. Credit utilization, the amount of credit used compared to total available credit, is significant. Keeping credit utilization below 30% of available credit positively impacts a score.
The length of credit history also matters; older accounts and a longer average age of all accounts benefit a score. This includes the time since accounts were opened and last active. A diverse credit mix, including revolving credit (like credit cards) and installment loans (such as mortgages or car loans), also contributes to a score. This demonstrates an ability to manage different types of debt responsibly.
New credit applications result in a “hard inquiry” on a credit report. While a single inquiry has a small, temporary impact, multiple inquiries in a short period can suggest higher risk and lower a score. Hard inquiries remain on a credit report for two years, though their impact on the score lasts for 12 months.
Checking Your Credit
Regularly checking credit reports monitors credit-building progress and ensures accuracy. Federal law grants individuals a free copy of their credit report every 12 months from each of the three nationwide credit bureaus: Equifax, Experian, and TransUnion. These reports can be accessed at AnnualCreditReport.com, the only official website authorized for this purpose.
Consumers have permanent access to free weekly credit reports from all three bureaus through AnnualCreditReport.com. Reviewing these reports helps identify errors or fraudulent activity that could negatively affect a score. While credit reports detail account information, they do not include credit scores. Credit scores can be accessed for free through credit card companies, banks, or financial service websites.