How do automatic bill payments affect your credit score?

There seems to be an endless list of things that can affect your credit score. So you might be wondering if your account is being affected by an automatic charge to your credit card or bank account. Your bills will be paid on time, and some utility companies will even give you a discount if you pay this way. But it’s a little more complicated than that.

The fact that utilities actually reward their customers if they sign up for autopay might be reason enough to go the autopay route. But unfortunately, from a traditional credit reporting and scoring standpoint, automatic payments matter no more than sending a payment by regular mail if it arrives on time. And, of course, the likelihood that all your payments will be delivered to the lender on time is increased by organizing automatic payments that arrive or at least are posted before the due date. What matters is what you do, not how you do it.

Paying your bills on time is the single most important factor influencing your FICO score. Payment history, which accounts for 35% of your score, tops all five score categories, with outstanding amounts coming in second at 30%, followed by length of credit history at 15%, and credit combination and new credit at 10% each .

This way, if you are never late due to automatic payments arriving on time, then your account’s payment history part will always be in great shape.

New ways to pay bills can help your credit history

If you have a thin credit history or are new to lending, it’s good to have a solid payment history based on very little data. But if you can add more data to your credit report for scoring, the impact of timely payments on scoring will increase and can be a wonderful thing – at least in terms of credit scoring.

This is where two new credit scoring programs can help improve your score. While Experian Boost is not directly tied to automatic payments, Experian Boost uses your bank account information to identify utility bills and phone bills (two types of bills that are not commonly reported to credit bureaus) that you pay on time through a deposit account before demand, such as a checking or savings account.

Another program is called UltraFICO. As the name suggests, this is a program from FICO, the credit scoring giant. This is a relatively new program that also uses your bank account information, but instead of checking payments, it looks for good money management and savings habits.

These programs are a step in the right direction for those with a thin credit history. You must be willing to share your bank account information in order to enroll in any of these programs, but you can opt out at any time.

These new programs still add new banks, credit unions, and lender names to their approved lists, so not every payment or account may show up. In addition, they are not global improvements for all three credit bureaus – at the moment they are only offered by Experian.

Do not install and forget auto payment

Simply signing up for autopay does not guarantee that your bills will always be paid on time. Each of these auto pay agreements is based on the fact that you will have funds in your bank account that you can send when it’s time to bill.

If the funds are not available, not only will the account not be paid, but you will likely also incur what is basically a “bounced check” fee from your bank. You will also have to pay a late fee and possibly even an additional “check back” fee from the company you were trying to pay. While the risk of “failure” can be mitigated with an overdraft line of credit or a reserve account that will cover any shortfall, it is an expensive way to pay your bills.

So, in terms of credit scoring, good intentions don’t matter much. Yes, there is a possibility that future payments will be made on time using Auto Pay, but the future probabilities do not match the actual payment history. Once again, the number one factor in credit scoring is a strong payment history on time and as agreed.

Autopay is not something you can just set up and forget. You must know when bills are due and when they will be withdrawn from your bank account to ensure that you have sufficient funds.

bottom line

Autopay can be a great way to pay your bills on time if you have the funds to make payments. If you go down this path, it’s very important to keep your credit card receipts and check all your bills every month to make sure you’re not overpaying and to check for other errors. Utility bills, insurance, heating and cooling in particular can fluctuate throughout the year due to seasonal changes and you may need to adjust your monthly budget to account for these fluctuations.

Steve Bucci has been helping people decipher and solve personal finance issues for over 20 years. He is the author of The Dummies’ Credit Management Kit, The Dummies’ Credit Repair Kit, Barnes and Noble Debt Management, co-author of The Dummies’ All-In-One Money Management Kit, and The Credit Repair Kit. For Dummies (Australia). Steve is an experienced expert witness in identity theft, credit scoring and debt cases. He has been a speaker at the FICO InterACT Global Conference, the Federal Reserve and the International Credit Symposium at the University of Cambridge in the UK.