Which On-Time Payment Will Actually Improve Your Credit Score?

Having a good credit score is crucial for getting approved for loans and credit cards with favorable interest rates. Many people think that simply paying all their bills on time will ensure a high score. However, the truth is that not all on-time payments help improve your credit.

How Credit Scores Work

Your credit score is calculated based on information in your credit reports at the three major credit bureaus – Equifax Experian and TransUnion. The most commonly used scoring model is the FICO score, which ranges from 300 to 850.

The five main factors that affect your FICO score are:

• Payment history (35%) – Whether you pay your bills on time.
• Credit utilization (30%) – The amount you owe compared to your credit limits.
• Length of credit history (15%) – How long you’ve had credit accounts.
• Credit mix (10%) – The variety of credit types you have.
• New credit (10%) – How many new accounts you’ve opened recently.

So while on-time payments are important, they are not the only thing lenders look at.

Which On-Time Payments Help Your Credit?

Only payments that get reported to the credit bureaus have an impact on your scores. Here are some common account types and whether they help credit:

• Credit cards – Get reported and help credit if paid on time.
• Auto loans – Get reported and help credit with on-time payments.
• Mortgages – Get reported and help if payments are made on time.
• Student loans – Get reported and help credit with on-time payments.
• Personal loans – Get reported and help if paid on schedule.
• Retail credit cards – Reported, helps credit with on-time payments.
• Rent – Typically does NOT get reported. On-time payments don’t help credit.
• Utilities – Not reported, on-time payments don’t help credit.
• Cell phone bills – Not reported, so on-time payments don’t impact credit.
• Cable/internet – Not reported, no credit impact for on-time payments.
• Insurance bills – Not reported, no credit benefit for paying on time.

So as you can see, only loan and credit card payments that appear on your credit reports can actually help improve your credit scores. Even if you pay all your monthly bills perfectly, things like rent, utilities, and insurance won’t boost your credit if they are not being reported.

How to Start Building Credit

If you currently don’t have any credit accounts, there are a few options to start establishing a credit history:

• Become an authorized user on someone else’s credit card. Their payment history will begin getting reported on your credit file.
• Open a secured credit card and use it responsibly by paying on time and keeping balances low.
• Apply for a credit-builder loan. The on-time payments will help demonstrate you can manage credit well.
• Consider peer-to-peer lending sites to obtain a personal loan that will get reported to the credit bureaus.

Initially, you may need to start with options designed for those new to credit or with poor credit. Over time, responsible use of starter credit accounts can help you build scores to qualify for better credit products down the road.

Tips for Improving Your Credit

In addition to making payments on time, here are some other tips to boost your credit scores:

• Keep credit utilization low on each card and overall.
• Don’t close your oldest credit card since length of history matters.
• Build diverse credit by having a mix of installment loans and revolving accounts.
• Limit new credit applications to avoid too many hard inquiries.
• Correct any errors on your credit reports through the dispute process.
• Become an authorized user on a family member or friend’s old account if possible.

Improving poor credit takes patience and diligently using credit properly over time. But taking the right steps can help rebuild your credit to open up better financial opportunities.