The monthly chore of paying all your bills can have a significant impact on your future borrowing ability if these bills appear on your credit report. Companies issuing some types of bills report both positive and negative payment history, while other bills only affect your credit score if you are seriously delinquent.
Types of Bills
Only some types of bills appear on your credit report on a regular basis. These bills typically are traditional loans and credit accounts, such as mortgages, auto loans, student loans and credit cards. Generally, if you take out a loan for a specific purpose from a bank or other traditional lender, every payment will appear on your credit report. Other types of bills, including your utilities, medical bills, payday loans, rent, library fines and parking tickets, do not appear on your credit report on a regular basis. The only times these affect your credit is if the service provider sends the account to a collection agency.
Credit Score Factors
Your payment history on bills that appear on your credit report accounts for 35 percent of your credit score. Your score increases as you build up a history of on-time payments, but your score decreases with each late payment. The later the payment is, the greater the negative impact on your score. The negative impact diminishes as time passes since the late payment. The payment history portion of your credit score also penalizes you for each account that went to a collection agency, each account settled for less than you owe and negative public records, such as bankruptcy and court judgments against you.
Effects
If you pay all your bills on time every month, this builds a solid foundation for your credit score. On the other hand, if you are consistently late on bills that appear on your credit report, this causes significant damage to your credit score. The number of points your score will drop depends on what your score was before the infraction and how much positive history you have to balance it out. Although the bills that do not regularly appear on your credit report will not damage your credit if you are a month late, these bills might result in you losing particular services if you fail to pay them. Plus, the company may give up on receiving payment from you, in which case it sends the account to a collection agency, and that will hurt your credit score.
Significance
If you know when a late payment will affect your credit score, you can strategically focus your attention on the bills with the greatest potential impact. It is best to pay all your bills on time every month. However, if you cannot afford to pay on time, making a late payment on a medical bill or traffic infraction might cause late fees, but will not affect your credit score. Paying late on a credit card or your mortgage, on the other hand, will affect your score immediately. In addition to considering the impact on your credit score, consider what services you could lose if you pay late. Missing a mortgage or car payment could result in you losing your home or car, while missing a credit card payment does not result in any immediate loss of property.
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