How Bad Credit Can Affect Your Utilities
A utility bill is a form of credit, which means that utility providers will take your credit score into account.
If we told you that having bad credit would make it harder to get a loan, you’d probably say “yeah, that makes sense.” People with low credit scores usually expect to be turned down for loans from traditional lenders and to have to pay more for the loans they can get approved.
But what if we told you that bad credit could affect more than that? Because guess what? It can. From landlords to some employers, having a spotty credit history can make you seem like a not so great candidate.
It can even affect something lots of people take for granted: your utilities. That’s right, a bad credit score could mean that even the water coming out of your tap is going to cost you extra.
Utilities are a kind of credit.
When we talk about utilities we’re talking about basic services for the home like water, gas, and electricity, as well as the internet, phone and cable. If you move into a new home or apartment and have bad credit, you might find that hooking up your utilities is a little bit harder than normal—and more expensive.
“Like many creditors, utility companies prefer customers with good credit rather than bad credit given they will be using the business’s product in advance of paying for it,” says Natasha Rachel Smith, head of global communications at TopCashBack (@topcashbackusa).
“Having bad credit will affect how reliable utility companies perceive you to be, as a shaky payment history could make you look like a liability.”
Technically, utilities are a type of credit—like a loan. They’re called “open accounts.” Every month you have an open balance that is to be paid in full. These accounts do not involve any interest and the cost of lending is included in the prices charged.
Still, there is a risk to the utility providers that a service-user might not be able to pay off their account in full. To account for that risk, utility providers do take into account a person’s credit score and history when determining how much to charge them.
Bad credit will increase your costs.
When you’re applying for a loan from the bank, having bad credit usually means that your application is turned down flat. However, some lenders will still be happy to lend to you with bad credit. The difference is that the interest rates these lenders charge will be much higher than the loan you get from a traditional lender.
With utilities, it’s pretty much the same. While there’s a much lower risk of your being denied outright, there is likely going to be an additional cost.
According to Jim Chilsen, spokesman for Citizens Utility Board (@cubillinois), “Keeping a good relationship with your utility avoids a lot of headaches—but a bad credit score is like a bad first date. You don’t want to start off on the wrong foot. That’s because utility companies are allowed to assess you a deposit if you have a low credit score. (Not all of them do it. Also, low-income customers are exempt from this possibility.)”
“Remember, if you are assessed a deposit based on a low credit score, you have a right to get a copy of the credit info that the utility used to make its decision, the same as you would with any other entity that runs your credit history,” says Chilsen.
If you’re applying for utilities with bad credit, Smith says that utility company might ask for a guarantee.
“Many utility companies require a ‘letter of guarantee’ to cover their end in case you become overdue. A letter of guarantee can be a deposit amount or formal confirmation from someone that they are willing to take legal responsibility to pay your bill in the event you don’t,” she says.
Chilsen also warns that “you might have to pay a deposit even if your credit score is good currently. For example, if in the past you’ve gotten your power or gas shut off or if your utility account ‘went into collections,’ the utility can ask for a deposit, even if your current credit score is decent and you do not currently owe it money.”
Lastly, if you unpaid accounts with a utility company, they could disconnect your service until you pay what you owe.
How do these deposits work?
Smith says, “Many new customers of utility companies have to provide a deposit amount within their first bill, which is usually the set or approximate cost of one month’s service; but if you have bad credit this deposit amount could be even higher—perhaps in the hundreds.
“After you’ve shown you’re a reliable payer, usually after a year, the deposit is given back to you.”
And how big can these deposits get? Chilsen offers an exact amount:
“It’s one-sixth of your annual bill, or if you don’t have a usage history at the property, one-sixth of the property’s previous annual bill. For commercial customers, it’s one-third.”
He also says that you can get the deposit back after one year, but it’s a little bit more complicated than that.
“How do you get back that deposit? Over the next year, you have to pay at least nine bills on time. Then you can get the deposit back, with interest.”
“The moral of the story is: Do whatever you can to keep current on your electric and gas bills. On the flip side, if you do not use credit much, a utility account can be one way to start establishing a credit history,” says Chilsen.
And he’s right. Your credit score doesn’t just affect your utilities. How you handle your utilities can also affect your credit score.
How your utility bills can affect your credit.
Paying your bills on time is important. Really important. In fact, your payment history makes up 35% of your credit score. It is the single largest factor in determining your creditworthiness. (Your amounts borrowed is also very important, making up 30% of your score.)
And when it comes to your utilities, some of your payments can be included in your score.
“We counsel utility customers to do everything they can to keep current or to show the company that they want to keep current with electric and gas bills,” says Chilsen.
“Gas and electric utilities will report your account to the major credit bureaus—so that means habitually late utility payments can hurt your credit score. The data utilities report to the bureaus is how many days past due you are or were, and what the dollar amount owed was at that time.”
Chilsen warns that “getting behind on your bills can set you on a spiral that leads to disconnection.”
“And once you get disconnected it’s difficult and expensive to get turned back on. Utility companies can make you pay the entire debt, plus a deposit of at least one-sixth of your annual bill, plus a reconnection fee.”
There’s another way that utilities can negatively affect your credit. According to Smith, “If you fail to make utility payments on time, your provider can pass the bill to a debt collector to chase you for the payment. That can lead to a negative impact on your credit standing.”
Having outstanding debt collections on your credit report is never a good thing. Fail to pay your utility bills and these “derogatory marks” on your report could really drag your score down.
In the end, your utility bills are like any other bill: failing to pay what you owe (and pay it on time) could have serious effects on your credit score and general financial wellness. While no overdue bill is ever worth taking out a predatory payday loan, it’s always good practice to have an emergency fund or some safer borrowing options if you find yourself short on cash.
Utilities exist to make our lives easier. Don’t let utility bills make your life more difficult.
|Natasha Rachel Smith, Personal Finance Expert at TopCashback.com (@topcashbackusa), is based in Montclair, NJ. Natasha’s background is in retail, banking, personal finance and consumer empowerment; ranging from sales to journalism, marketing, public relations and spokesperson work during a 17-year career period. She’s originally from London, UK, but moved to Montclair, New Jersey, USA, several years ago to launch and run the American arm of the British-owned TopCashback brand; a global consumer empowerment and money-saving portal company.|
|Jim Chilsen (@cubillinois) is the spokesman for the Citizens Utility Board, a nonprofit, nonpartisan organization that has been representing the interests of residential utility customers across Illinois since 1984.|