Can Paying Your Bills on Time Increase Credit?

paying bills on time

Can paying your bills on time increase credit? The short answer is yes, definitely. But there’s a catch. Before we get to that, it pays to understand why paying your bills on time works to improve your FICO scores and earn you access to more credit.

Learn To Think Like A Lender

Many people are mystified by their credit–they don’t understand what makes their FICO scores rise or fall, and they don’t know why they have the credit score they currently have. But it really isn’t as mysterious as you might think. Why?

Because once you know how your creditor thinks, it’s easy to begin arranging your finances to appeal to your next lender. What does this mean?

No matter what kind of application you are filling out–an auto loan, a store credit card, a home loan, or even a private student loan, the lender must be able to justify your loan as a good risk. The lender is taking a chance on you when approving the application. Furthermore, the lender’s job might depend on how successfully she screens out the bad credit risks from the good ones.

When the lender looks at your application, your credit report must be reviewed. What does the lender see when reviewing your report?

Knowing that this is your loan officer’s job makes it easier to understand why the applicant with no late or missed payments in the last year or better gets the approval when the person who has late and missed payments (especially in the year leading up to the application) gets turned down.

Remember, it’s your lender’s JOB to ensure you are a good credit risk, and your lender does NOT want to get FIRED. But more than that, your lender sees many, many credit applications every day.

Why approve a loan application from someone who has missed three payments this year when you have a loan application from someone who is a MUCH better credit risk and has missed NO payments in the last 12 months? You want to be that better credit risk.

Why Paying Bills on Time Can Increase Credit

All three major credit reporting agencies acknowledge the same three pillars of good credit; on-time payments, combined with healthy credit utilization (below 50% of your credit limit is good, but 30% or lower is ideal), and your capacity to repay the debts you currently have.

Paying on time, every time, without fail is challenging, but much easier to do in the age of autopayments and online banking. On-time payments for a year or better WILL raise your credit score, which in turn gives you more access to credit.

If you have one late or missed payment in the last year, that may not be the kiss of death on a major loan application but your lender will need to know the circumstances of that late payment (for major loans) and know that it was an isolated incident.

For smaller credit lines this may not be as serious of an issue, but the fact is that even one late or missed payment could hurt your FICO score. And repairing your own credit (which is much more advisable to do than to pay a third party to do the same exact things you can do on your own and for free) requires consistency in your use of credit. It is a long game, to be sure, but paying your bills on time DOES increase your credit.

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