There are several factors that affect your Credit score, but your payment history is considered to be the most influential of all. This goes without saying that how you handle your bills – paying or ignoring – very much affects it.
Like most people, you may be handling a wide variety of bills to pay, and may also be wondering which ones to prioritize and which ones to set aside without hurting your credit score.
What Bills Affect Credit Scores?
“Bills” would be defined as an invoiced account that you need to pay back as part of a loan agreement or a service contract. As 35% of your credit score is derived from paying your bills from any of your credit accounts, it’s important to know which types of accounts impact your credit score.
Traditionally, your payments from revolving loans and installment loans affect your credit score. But new scoring models now also take into consideration payment patterns from your service accounts.
Revolving Loans
Revolving loans involve accounts where there is a specified borrowing limit that you can borrow from and make monthly repayments in varying amounts. This type includes your credit card accounts and some home equity loan accounts.
Installment Loans
In this type of loan, you borrow a lump sum of money and payback in a series of fixed amounts at a fixed time, for months or years. This could be your mortgage, car loan, student loans, special installment loans from merchants, and other legally enforceable loans backed by promissory notes.
Service Accounts
Although non-debt in nature, your bills payment from your service accounts – phones, utilities, and cable – also provides information to scoring models. However, not all service providers report your payment information to the national credit bureaus, and they are likewise not obligated to do so. By signing up for a free program called Experian Boost, you will be able to allow Experian to securely access your online service payment history, thereby giving your score a lift.
What Happens When You Don’t Pay Your Bills?
It is not always easy to manage your bills, especially when they come due at a time where your funds aren’t available yet. When a sudden emergency or loss of income happens, you may also begin to miss payments or worse default on your accounts.
Knowing what can happen to your accounts when you stop paying your outstanding bills may help you in deciding which ones to pay first.
Utilities
- Utility service may be shut off.
- A large reconnect charge may be difficult to pay later.
- Interest and fees may be charged on overdue amounts.
Mortgage
- You will receive notice from your lender that foreclosure will begin if you do not pay by a certain date.
- Late fees will be added to the amount you owe.
- Cosigner will be asked to pay
- Foreclosure
Other Creditors such as credit card companies, car loan lenders, credit union, and other businesses that extend loans
- Bills will be turned over to an independent collection agency.
- You will be hounded with payment reminders
- Creditors can take several kinds of legal action against you.
Government Debts
- Debts like property taxes or child support are handled differently than a loan or credit card payment.
Which Bills Should You Prioritize Paying?
Regardless of your financial situation, you are legally obligated to pay off your debts or bills. Any unpaid debt will just create damage to your credit record that might take a long time to recover.
But when paying your bills starts to get overwhelming, here’s a general guide on which bills to pay in order of priority.
High Priority
- Mortgage payments
- Basic living expenses such as your groceries and medical insurances
- A minimum payment is required to keep your essential utilities running
- Car loans and car insurance, especially when you use your car for work
- Income taxes
- Court judgments on loan settlements
Medium Priority
- Student loans
- Credit accounts that have been charged with penalty fees
- Credit accounts that are still open for settlement negotiation
- Co-Signed debts
Low Priority
- Loans without collateral
- Loans with household goods as collateral
- Loans on defective merchandise pending product repair or exchange
How to Properly Manage Your Monthly Bills?
If you’re trying to avoid getting caught up in paying your bills, then you need to set a firm financial discipline at the onset. The idea is to make small positive habits in all areas of your finances until they become second nature to you.
Start from this shortlist of positive money management. Keeping them in mind and putting them into action will help you pay your bills on time.
- Make a bare minimum list of your living expenses bills and expenses.
- Determine which among your list of expenses are fixed and variable. Find out ways to trim down your variable expenses.
- Understand your income and cash flow.
- Prioritize and schedule your bills.
- Find a way to find a side job when your current income is not enough to pay current expenses.
- Consider reconstructing or consolidating your debts if it will improve your current financial situation.
The best way to manage your credit score is to manage your bills. Take full responsibility in finding ways to set up a good system that organizes your bills and streamlining your payment process. By doing so, you have to ensure that you’ll be able to pay your bills on time, every time.
