Recent years have seen a lot of backlash against the credit scoring industry.
Since the recession, many consumers are reducing their reliance on credit when it comes to making purchases. However, the result hasn’t been what many expected.
Canceling accounts and swearing off credit can impact a credit score, sending it lower. Not a good thing.
If you don’t plan to borrow money, it may not seem like such a big deal. However, even if you don’t borrow, your credit report and your credit score might impact your financial situation.
Some insurers use your credit score as a factor when setting your premiums. Landlords might check your credit when determining how much to charge you for a security deposit. Cell phone and Internet service providers often run credit checks before setting you up. Even a potential employer might ask for permission to view your credit report.
Many consumers who feel as though they are more responsible than ever are discovering that the credit scoring industry is just interested in encouraging, well, behaviors that involve credit.
But consumers feel that if a credit report and score are going to be measures of overall financial responsibility, non-credit payment items should be added to the list.
One of the items of interest right now has to do with adding utility payments into the equation.
Should Your Utility Payment History Be Part of Your Credit Report?
Why Add Utility Payments to Credit Histories?
Right now, your utility payment history can impact your credit score.
However, it only happens if you miss enough payments that your utility company sends your account to collections (this is true of any bill that would be sent to collections). Consumers that make regular, on-time payments to their utility providers month after month don’t see any benefit. They are showing that they are reliable and make payments on time, but that isn’t reflected in a credit score because it isn’t a loan (or a delinquent account).
The thinking is that if there are non-credit reasons to check your score, such as for insurance or Internet, there should be non-credit payment histories on your report. If your history of on-time utility payments can shed light on the fact that you’re responsible and deserve a lower car insurance premium, adding the information to your credit report and including it in the credit scoring algorithm makes sense.
Could Utility Payments Be Added?
The House and the Senate both have versions of bills that would amend the Fair Credit Reporting Act to allow for utility payments. The bills are slightly different (with the Senate version more comprehensive than the House version), and both are in committee.
Of course, the reality is that many bills never become law. In fact, the site Govtrack.us gives the Senate of the bill only a 1 percent chance of being enacted and the House version a 7 percent chance. That’s not a big chance for a bill that could help change the way utilities are reported, and that could help many middle class Americans maintain good credit histories, even if they don’t want to borrow money.
In a similar category is the idea of reported rent payments.
Experian already allows for the report of rent payments on its credit reports. However, in practical terms, the fact that you pay your rent on time still isn’t going to make a big difference to your credit score, since it’s little more than an informational thing at this point.
Could Utilities Reporting Hurt Your Credit Score?
The flip side to adding utilities to a credit report is the fact that there is a good chance that your score could suffer.
If you don’t make your utility payments on time, there is the possibility that your score could be impacted more immediately. As it is right now, it takes months for utility payments to impact your credit rating. This is because the utility company doesn’t report to the credit bureaus in a direct manner. After taking months to try and get you to pay, the account is turned over to collections. Then it takes a little time for the collections account to appear on your report.
Adding utilities reporting to credit reports would speed up the process. If utilities payments were reported with the same frequency as credit card payments, the situation would be quite different indeed. A single missed payment could be reported quickly — and drag your score down just as quickly.
Utilities reporting benefits those who already make their payments on time. It would only make things worse for those who struggle already.
I know it’s not ideal but there are plenty of people out there stuck in a cycle of living paycheck-to-paycheck who sometimes rob Peter to pay Paul, so to speak. In other words, since the impact of not paying one utility bill may not be that harsh (you rarely have a utility cut off for one missed bill and we discussed how it won’t affect your credit report yet), a person might skip a payment to make sure they can cover a bill that has a bigger impact if they miss it, like rent or a credit card. Again, I’m not saying this is ideal. I’m saying that adding utilities to credit reporting may have a negative impact for some people.
Alternative Credit Reporting
There are options right now for alternative reporting.
However, these types of credit reporting programs cost you money. You have to pay to have this information compiled, and if you apply for a loan again later, you need to have the information re-compiled with the latest updates, costing you again.
Some alternative credit reporting agencies allow you to set up arrangements for your service providers to report to them regularly, but you have to convince the provider to take the time to make the reports. If the service provider or your landlord aren’t on board, then it does you little good.
Finally, these alternative credit reporting agencies are limited in terms of reach.
While some have relationships with major banks, chances are that you will have to choose from a small number of partner lenders willing to take a chance on someone who doesn’t fit the “traditional” credit mold. This means that you might still be stuck with higher interest rates if you get a mortgage or car loan. And in many cases these agencies can’t help you in the event of a credit check for cell phone service or insurance.
Another Technique for Keeping Your Credit In Good Standing
Your credit score depends on how you use credit, right?
If you generally don’t use credit but want to have an on-going credit history what you can do is keep one credit card and put a small recurring charge on it, like Netflix. Then set up an automatic payment to make sure it’s always paid in full and on time. This small recurring charge then shows up in your credit history as a fully paid item that has a very low debt-to-credit ratio. It may seem silly that one small charge every month can help your credit score but it can.
Final Word On Using Utilities On Your Credit Report
If credit scoring is going to be an increasingly important part of the financial landscape — even when it comes to non-credit items, it makes sense start adding non-credit payment items to credit reports. These will give a better view of what’s really happening with a consumer’s financial situation.