By Sarah Kaufman, Manilla.com
You may have heard before that paying your bills on time can affect your credit score. But, the ways in which it affects your score can get complicated, so let’s break it down.
A large chunk of your FICO score (35 percent to be exact) is based on payment history, which looks at how often you’ve made on-time payments for your credit accounts. These are things like your credit cards, mortgage and student loans. When you make on-time payments, you’ll see your credit score stay the same or improve, and when you make late payments, in most cases, you’ll see a decline in your score. [More from Manilla.com: How to Read a Credit Report]
Now, if you make on-time payments for your other bills, like your rent and utilities, you won’t see a change in your credit score at all. Why? Because even though you’re making these payments on time, your utility companies and your landlord do not report this information to the credit bureaus, so it’s not reflected on your credit report.
However, despite the fact that you don’t get rewarded for good behavior, failing to make the on-time payments could negatively impact your credit score. To see how, let’s use this as an example: [More from Manilla.com: Sinking in Debt: How to Keep Your Head About Water]
Let’s say you’ve made a late payment on your electricity bill. If your electric company reports this bill as delinquent to the credit bureaus, and you continue to not pay the bill, then the company can get a judgment against you. This means it’s reporting in small claims court how much money you owe the company, and your electricity account could be turned over to a collection agency. These are the items that show up on your report and, ultimately, hurt your credit. So, in other words, it’s not the late payment itself, but the consequences that result from that late payment, that could hurt your score.
The reality is it’s always better to pay all of your bills on time to avoid having to pay late fees, hurting your credit score, and damaging your overall financial standing.
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Sarah Kaufman is the editor-in-chief of The Manilla Folder at Manilla.com, the leading, free and secure service that helps you simplify and organize your daily life. Using just one password, Manilla lets you manage your finances, utilities, daily deals, travel and rewards programs, Netflix and magazine subscriptions, and more — all through Manilla.com or the top-rated iOS and mobile apps. Sarah is also a regular contributor to Yahoo! Finance, Good Housekeeping, Woman’s Day, The Motley Fool, and other major sites.