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Can Bad Credit Affect Your Utility Bills?
Bad credit can affect more than just your ability to get a loan. Landlords, lenders, credit card companies, and even some employers often see a spotty credit history as a risk — meaning your credit score could lead you to miss out on a great apartment, a higher credit limit, or even your dream job.
To add insult to injury, having bad credit can also affect a group of basic resources that can be easy to take for granted: utilities. That’s right, even the electricity coming out of your wall could cost more with a bad credit score. Meanwhile, your on-time utility bills are less likely to improve your credit score, even though late payments can further hurt it.
What are utilities, anyway?
Your utilities consist of the basic resources that service your home:
Basically, your utilities aren’t optional; they make up all the things you need to live comfortably in the 21st century.
Some utilities may be included in your rent payments. Some may not. If you don’t rent your home and are part of a homeowner association, some of your utilities may be billed through your monthly fees -- or they too, may all be your own responsibility. Regardless of your living situation, when it comes to the utilities you are responsible for paying yourself, you might be required to undergo a credit check.
Utility contracts are a form of credit
Technically, when utility companies set up an account for you, they’re issuing you credit. These accounts are called “open accounts” -- as in, every month you have an open balance that needs to be paid in full.
The difference between a utility account and a traditional personal loan, student loan, or car loan is that an open account does not involve any interest, and the utility company includes the cost of lending in the prices it charges.
Still, there is a risk to the utility provider that a service-user might not be able to pay off their account balance in full each month. To account for that risk, service providers will use a person’s credit score and history to determine how much to charge them.
(Also, if you're considering a bad credit loan for utilities, or any other purpose, be sure to read (Also, if you're considering a bad credit loan for utilities, or any other purpose, be sure to read
the OppU Guide to Bad Credit Loans here first first.)
How poor credit scores impact utility bills
While utility companies aren’t going to charge you huge interest rates for having a low credit score, you may be looking at additional costs when you want to set up your water, electricity, or gas account, according to Jim Chilsen, spokesman for Citizens Utility Board, an Illinois nonprofit that looks out for the interests of residential utility customers:
“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.”
Chilsen clarifies that not all providers will require a deposit, and low-income customers may be exempt, so you should look up the laws and regulations in your area. Even if you currently have a good credit score, Chilsen warns that previous credit scoring issues, like an account that had fallen into collections, could lead to requiring a deposit.
Bad credit may create additional hassle
If you’re applying for utilities with a low FICO score, the utility company might ask for a guarantee.
One form of this is a “letter of guarantee” from someone who agrees to take over your payments if you do not make them. This is similar to having someone cosign a loan or bank account if you cannot qualify for one on your own.
How do utility deposits work?
Assuming you keep up with your utility payments, Chilsen explains you should be able to get your deposit back (with interest) after a certain number of monthly payments. Of course, if your payments are past due, you could lose that deposit and risk having your utilities shut off.
And how big can these deposits get? Chilsen offers an amount codified in many state laws:
“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.”
Be aware your state laws may differ, however, so do your own local research.
How do your utility bills affect your credit?
Your credit score doesn’t just affect your utility bill payments. The reverse is also true: How you handle your utilities can impact your credit score.
Overall, paying your bills before the due date is a really important personal finance tip. In fact, your payment history makes up 35% of your credit score. It is the single largest factor in determining your creditworthiness. (The amount you’ve borrowed comes in second at 30%.)
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,” Chilsen says.
Unlike many other loan payments, timely utility payments have not traditionally been reported to the major credit bureaus to improve your score, though Experian has introduced a credit repair program called Experian Boost to allow this.
Unfortunately, when it comes to your utility bills, it can be easier to cause harm than it is to build credit.
Regardless of whether you can find a way for on-time payments to appear on your credit report, too many late payments will bring in the debt collectors and that is always going to drag down your credit. As if dealing with late fees and a collection agency wasn’t bad enough, the credit reporting agencies -- typically Equifax, Transunion, and Experian -- will keep that collection on your credit file for many years to come.
Can’t pay your utility bills?
The ongoing COVID pandemic has made it more difficult for many Americans to pay their utility bills. If you’re struggling, you can find information about federal programs to assist with utility bills as well as cell phone payments and other expenses here. Your state government likely has a similar list of resources online you can look into.
Utilities exist to make our lives easier. Don’t let utility bills make your life more difficult. Make your payments on time, and if you can’t, try to see if there are resources available to help.
Jim Chilsen is the spokesperson for the Citizens Utility Board, a nonprofit, nonpartisan organization that has been representing the interests of residential utility customers across Illinois since 1984. Follow the Citizens Utility Board @cubillinois for more information.