Consistently paying your bills on time is the most important credit scoring factor, no matter what method you use. If you choose automatic bill payments, be sure to monitor it and how much money is in your bank account when it comes time to pay.
Dear Keeping Score,
Does having bills paid with automatic debits from a bank account or credit card affect a credit score? I’m asking because it seems that the likelihood that future payments will be paid on time is increased if someone has automatic debits … some utilities even give a discount if you pay this way. –Celeste
The answers to your questions are no, yes and maybe. On the face of it, your argument makes sense. As you point out, some utility companies do indeed reward their customers if they will sign up for auto-pay. That alone may be sufficient reason for going the auto-pay route.
But, let’s look at your questions in more detail. First, let’s look at the “no.” Unfortunately, from a traditional credit reporting and scoring point of view, automatic payments don’t count for any more than sending in a payment via snail mail, as long as it arrives on time. What counts is what you do, not how you do it.
As for the “yes”, the likelihood of getting all your payments delivered to the creditor on time is increased by arranging automatic payments that arrive, or at least are posted, before the due date.
Paying bills on time is the biggest factor making up your FICO score. Accounting for 35 percent of your score, payment history leads all five scoring categories with amounts owed coming in second at 30 percent, followed by length of credit history at 15 percent, and credit mix and new credit accounting for 10 percent each.
So, if you are never late because of automatic payments arriving when they are due, then the payment history piece of your score will always be in tip-top shape.
New ways your bill payments can help your credit score
The “maybe” answer comes into play if you have a thin credit file or are new to credit. A strong payment history based on very little data is a good thing, but if you can add more data to your credit report to be measured, the scoring impact of on-time payments goes up and can become a beautiful thing – at least from a credit scoring point of view.
This is where two new programs in the credit scoring arena may help to boost your score. While not tied directly to automatic payments, Experian Boost uses your bank account data to identify utility and phone bills (two types of accounts that are not typically reported to credit bureaus) that are paid on time through a demand deposit account such as a checking or savings account.
The other program is called UltraFICO. As the name implies, this is program of FICO, the credit scoring giant. It’s a relatively new program that also uses your bank account information but rather than checking for payments, it looks for good money management and savings habits.
These programs are a step in the right direction for someone with a thin credit file. You must be willing to share your bank account information in order to sign up for either of these programs, but you can opt out at any time.
These new programs are still adding new banks, credit unions and creditor names to their approved lists, so not every payment or account may show up. Also, they are not across-the-board improvements to all three of the credit bureaus – only Experian offers them for now.
Auto-pay is convenient, but don’t set it and forget it
Simply signing up for auto-pay does not guarantee your bills are always going to be paid on time. Every single one of these auto-pay agreements is predicated on the notion that you will have funds available in your bank account to send out when the bills are due.
If funds are not available, not only will the bill not be paid but you will likely also incur what is basically a “returned check” charge from your bank. You’ll also be hit with a late payment fee and maybe even an additional “returned check” charge from the company you were trying to pay. While the “bounce” risk can be mitigated with an overdraft line of credit or a backup account that will cover any insufficiency, this is an expensive way to pay bills.
So, from a credit scoring point of view, good intentions don’t count for much. Yes, there is a likelihood that future payments will be made on time using auto-pay, but future likelihoods are not the same as actual payment history. As I have said in this column over and over, the No. 1 factor in credit scoring is a strong history of paying on time and as agreed. My mantra is: pay all your bills, on time, every single time.
I am not suggesting auto-pay is not a good thing. I am personally a user of auto-pay if for no other reason than it simplifies my life. But just like all things related to money management, it’s not something you can just set up and forget. You need to be aware when bills are coming due and when they will be withdrawn from your bank account to ensure adequate funds are available.
I also believe you should save your credit card receipts and examine all of your bills every month to be sure you are not being overcharged and to check for other mistakes. Utility, insurance, heating and cooling bills in particular may fluctuate over the course of the year due to the change in season, and you may need to make adjustments to your monthly budget for these fluctuations.
I applaud your analytical thinking. And I hope you are reaping the rewards of paying at least some of your bills using automatic payments.
Remember to keep track of your score!