Some financial obligations are reported monthly to the credit bureaus and others are not. Credit cards, mortgages and other loans are reported monthly. Every month, on-time payments help boost the consumer’s credit score. The cable TV bill, utility bill, cell phone bill and landline phone bill have historically not been reported unless delinquent and in collections, in which case the negative effect on credit is serious. That is about to change.
The most recent FICO scoring model, released in early April 2015, takes alternative payment data into account. That means cable bills, utility bills, cell phone bills and other financial obligations that previously were not reported unless delinquent will be factored into consumers' FICO scores.
This is great news for people who pay their bills and manage their money responsibly, but have few or no credit products in their files (see Do I Need A Credit Card To Build My Credit?). But it also means that paying the bills on time is now more important than ever.
What’s a Payment Worth?
Payment history is the single most important factor in a credit score. A FICO score – the most widely used credit score, developed by Fair Isaac Corporation – is made up of:
- Payment history (35%)
- Credit utilization (30%)
- Account age (15%
- Inquiries/new accounts (10%)
- Credit mix (10%)
- Payment history
- Age and type of credit
- Credit utilization
- Size of balances
- Inquiries/new accounts
- Amount of available credit
VantageScore is opaque when it comes to the exact weight it assigns to each category. But let there be no confusion about the importance of paying bills on time. A consumer’s payment history is the only factor singled out as being “extremely influential.”
Late Payments and Your Credit
All creditors want to know that a debtor will pay his or her debt as agreed. They use credit reports and credit scores in a backwards-looking fashion to assess how much of a risk a consumer poses. If a consumer has established a pattern of paying all bills on time, he is viewed as a responsible user of credit and not likely to cause the creditor great financial losses. Having a history of late payments, on the other hand, signals unreliability, financial instability and a greater financial risk.
Consequences of late payments escalate in severity as the account becomes more and more delinquent. The consumer’s credit report shows payment history with degrees of lateness: on-time, 30 days late, 60 days late, 90 days late, 120 days late. Each degree of lateness causes incrementally greater damage to the credit score than the previous degree. Collection, repossession, charge-off, bankruptcy and other notations that signify failure to fulfill a financial obligation may also appear, and these cause a greater hit to the consumer’s score than late payments.
Prior to FICO’s announcement, it is not clear how alternative payment data will appear on a consumer’s credit report.
How Long Do Late Payments Hurt?
Credit reports reveal the payment history on all accounts (open or closed), but the impact of late payments on the consumer’s credit score diminishes over time. Recent and multiple late payments result in greater damage to the consumer’s credit score than a single late payment that has faded from memory.
VantageScore further explains that the greatest damage comes to the consumer’s credit score in the first month after the late payment is reported. Then the impact diminishes over about two years, when it ceases to have much effect on the credit score (although the late payment stays in the consumer’s file for seven years)
It is important to note here that since a cable bill will generally not be reported until it is seriously delinquent (and in collections), the impact will be greater than that of a single 30-day late payment on an account reported monthly.
For details on the goal you're targeting, see What Is A Good Credit Score?
The Bottom Line
Late payments, now more than ever, will result in negative consequences to a consumer’s credit standing. Furthermore, many utility providers, including those that supply cable TV, impose a late fee immediately when the payment is not received by the due date. The next step is to threaten, and then impose, a service suspension. When the account is in serious arrears, usually around the 90-day mark, it is officially marked for collection and reported to the consumer’s credit file, and the process of rebuilding credit must begin in earnest (see Best Ways To Repair Your Credit Score).