Pay your utility bill on time every month? Never miss a rent payment? Those are both smart financial moves, but here's the downside: Neither of those sound habits will improve your credit score, and they're not the only ones. Many of the timely payments you make each month may offer no benefit to your credit score. While this doesn't mean that you should begin neglecting your utility bills, it does mean that the payments you prioritize each month can affect your credit in unexpected ways.
Scott Shellady, vice president of the Trean Group, a Chicago-based brokerage, says it's unfair that many on-time payments don't help consumers' credit. Many consumers pay their electricity and water bills on time every month, even when they are struggling financially, because they don't want these services cut off. They might, however, choose to skip a mortgage payment because it can take a far longer time for the full consequences -- a foreclosure -- of missing this payment to occur. The result? These consumers' credit suffers for the missed mortgage payment, but receives no boost for the on-time utility payments. "They might pay 80 percent of their bills on time every month," Shellady says of people in this situation. "But that doesn't show up in their credit score. Instead what does show up is that they missed a mortgage payment. That's unfortunate. There should be some positive result for paying bills such as utility and water bills on time each month." Unfortunately, many of the bills that you pay each month won't help your credit score at all -- though some of them can do the opposite if you fall into delinquency.
The high cost of a low score
Mortgage lenders rely on your credit scores to determine whether you qualify for a mortgage loan and what interest rate you'll pay on it. Similarly, a low credit score might make it impossible to qualify for an auto loan. Some insurance companies also use credit scores to help set the price of your policy. Some employers might even pass on your resume if your credit score is too low. Today, many lenders agree that FICO credit scores of 740 or higher are considered excellent. On the other hand, FICO scores of 620 or less can make it tough to qualify for a mortgage loan at a reasonable interest rate.