Isn’t it ironic how you can have an excellent payment history, but poor credit?
Your credit score is one of the most prized possessions in your financial profile, and a low score can be very detrimental to your financial well-being when you need to borrow money. It doesn’t help when you desperately want to improve your score, but are in the dark about how to move forward.
Here are six expenses that will not facilitate your efforts to build your FICO score, the score most commonly used by lenders:
1. Household expenses
You’d think the opposite would be true because these companies usually require a credit check before they’ll do business with you. It doesn’t matter if you make timely payments each month because the companies don’t report to the three major credit bureaus. However, there are exceptions:
- Rent. A broken lease that results in a judgment or an eviction may be reported to the credit bureaus and affect your FICO score.
- Cable and utilities. Past-due bills will be reported to the credit bureaus if they remain unpaid after a substantial amount of time and/or the bill is sent to collections.
- Cellphone. Some cellphone companies do report your regular payments. Breached contracts with an outstanding fee or a delinquent account that calls for termination can damage your credit score.
2. Support obligations
Are you required to provide monthly support to your children or former spouse? The credit bureaus likely don’t know about that either.
However, fall far enough behind and your arrears will be reported to the credit bureaus if a state child support enforcement agency gets involved. Fail to pay and it can damage your credit score.
3. Tax payments
Do you make property, state or federal tax payments during the year? If you pay on time, this information won’t be reported either. But if a lien or wage garnishment results because you don’t pay, it will show up on your credit report.
“[H]aving a [federal] tax lien on your credit report is a serious negative item and it could remain on your credit report for seven years after the tax bill is paid, unless you take steps to have it withdrawn,” says Credit.com.
4. Contractual agreements with small or mid-sized companies
Paying for a monthly service? Your record of good payments won’t be reported. If you stop paying, the company may simply stop providing the service and write off the delinquent account as a bad debt expense. But if they send the bill to a collection agency, that will hurt your score.
5. Insurance premiums
Because premiums are usually paid in advance, health, auto, homeowners and life insurance companies don’t typically report transactions to the credit bureaus either. If you don’t pay, eventually they’ll simply cancel the policy.
6. Medical bills
Have you arranged a payment plan with your health care provider for the portion of bills not covered by health insurance? The balance and payment activity don’t show up either, unless, of course, you’re delinquent. Says Bankrate:
Your monthly payment to a doctor or hospital will not be reported, but failing to pay will result in the bill being sent to a collection agency. That agency may report the account to your credit bureaus. Some, albeit only a few, hospitals will assign the bill to a collection agency but advise the agency not to report the bill to your credit report. The collection agency will attempt to collect the debt but not create a negative mark on your credit report.
VantageScore 3.0 to the rescue
The VantageScore is a direct competitor of FICO, and calculates your alternative credit score using the following factors:
- Payment history — 40 percent.
- Depth of credit — 21 percent.
- Utilization – 20 percent.
- Balances — 11 percent.
- Recent credit – 5 percent.
- Available credit — 3 percent.
Credit scoring company VantageScore is trying to shed light on this mysterious group with its newest scoring model, which it estimates can assess an additional 30 [million] to 35 million people who were previously unscoreable. It does this by looking at 24 months of credit history, rather than six months, and by considering alternative data like rent and utility payments and public records when available.
FICO also has a special mortgage credit score that reflects timely payment of rent and other obligations.
If you must apply for a loan, find out which credit score the lender is using.