The cell phone and the cell phone contract have often raised questions in the minds of many individuals as to whether they could assist in the development of credit scores or serve to enhance the credit scores of an individual. With virtually every carrier offering numerous different cell phone plans, including no-contract and prepaid plans, how cell phones could affect credit is often a question. Back to and revolve around cell phones and credit scores in this article, we shall discuss what you need to know.
The Short Answer
The short answer is that having a cell phone contract in your name can build credit, but only if three criteria are met:
- You have to use a postpaid cellular plan (not a prepaid or no-contract plan).
- The cell provider informs credit reporting bureaus that you have paid your monthly bills on time to at least one of the three credit rating agencies.
- You have no other credit accounts or insufficient credit history You don’t have another credit account or lack the credit history necessary for the assessment.
Well, we can say that if all these three factors mentioned above are met, then indeed, a cell phone can be useful in creating credit history and even building credit from scratch. However, it is not as effective when applied to increase higher scores.
The details about the choice and the justification of the provided answer are presented in the Long Answer and Explanation section.
Past payment behavior is good when it comes to your cell phone payments and it impacts your credit, though only for postpay, not prepaid or no-contract services. Contract phones include postpaid phones that involve a credit check, a contract agreement for one or two years, and bills for purchasing the handsets and paying for the services.
The timely payment every month for postpaid cell service is an indication that you are a responsible user and thus, a good payment history will feature on your credit file. As I mentioned, cell phone payments are one of the ways of maintaining a good payment history and since this aspect makes up 35% of the FICO credit score calculation, timely payments also contribute to a good credit mix and length of credit history.
But there’s a catch: It is good to know that the majority of the major cell carriers do not report your payment activity to the credit bureaus. Verizon Communications company, Verizon Wireless, and another telecommunications company, Sprint, provide monthly payment information to all three credit bureaus (Experian, Equifax, and TransUnion) that can help subscribers build credit histories. Other such companies that do not report include AT&T, T-Mobile, Cricket, and Metro Pcs among others. Therefore, carrier selection impacts the inclusion of cell usage in credit reports, if desired.
The second idea for most people including teenagers, college students, immigrants, or anyone with a limited credit history, a cell contract account is one way through which an individual can create a payment history with bureaus and thus build legitimacy of credit. However, major cell carriers are defined as ‘alternative data’ suppliers for credit agencies in contrast to conventional lines such as credit cards or loans.
For those people who already have fair/good credit histories and FICO scores greater than the range of 700, it can be assumed that the purchase of cell phones will not enhance their credit ratings significantly. For other credit accounts such as credit cards, auto loans, and mortgages credit history appears to be given more importance than cell providers in score computations. So people should not rely on cell payments alone to establish a healthy, let alone stronger credit position.
More to Consider Regarding Cell Phones and Credit Investing in cell phones is an expensive affair, and there are some other things that you should consider regarding credit.
A few other things to know about the relationship between cell phones and credit:
- Installment Loans – In recent times, some of the cellular service providers such as Verizon, AT&T, and T-Mobile introduced 0% interest retail installment agreements for purchasing new cell devices. Unlike some of the other forms of installment loans, these are personalized hence do not need down payments and allow full device cost to be spread over monthly plan payments for 12 or 24 months. They are recorded on credit reports as an installment account; therefore, payment on time will help to improve credit records similar to doing so when one has a consumer loan. The only thing that you need to ensure that you avoid is using credit cards and paying for the amount by the due date to avoid charges that lower the scores.
- More often than not - most service providers permit customers to include other individuals over 18 as authorized users on their account such as children, spouses, partners, or roommates among others. Most credit bureaus consider adding the said trade lines to the credit file provided that the account is postpaid and holds a positive credit standing. Thus, when you attain an authorized user status on someone else’s cell account where they have maintained a good payment record, this is another way through which you can build credit while not having solo contracts.
- Credit Checks and Hard Inquiries – Credit reporting agencies, when considering cell carriers’ postpaid service applications, perform hard inquiries and checks. This is the reason why, several hard inquiries within a short space of timeshares are capable of hurting credit scores. Nonetheless, the FICO scoring models consider all cell carrier inquiries made within 45 days as a single inquiry. Therefore, regardless of how many cell companies you apply for accounts with, the credit impact of had inquiries is minimal within that period.
- Credit Locks and Freezes – Many cell carriers suggested that they do not allow applications to go through if the client has a credit lock or a security freeze on his account. As such, if there are freezes on the credit file, it may be necessary to lift the freeze when applying for postpaid cell service since credit checks are conducted. If this is not the case, the carrier cannot view its reports to approve the application or give approval.
- Spend Wisely – Although paying bills on cellular services can be credited, one must select services and equipment that they can comfortably afford. When one misses monthly payments due to high cell phone bills, credit rating is severely affected. It is noteworthy that payment history accounts for a whopping one-third of the credit scores.
- Use Recurring Auto Pay – To maximize the benefits of credit, people should set up recurring monthly postpaid accounts so that payments are not missed because the person forgot the date or the billing cycle changes every month. Automated payments reduce the number of dues and bills that have to be paid on time to improve scores.
The Bottom Line
In the long run, a postpaid cell phone, which sends information on your payment to the national credit bureaus, can help to create or rehabilitate a skinny credit file. However, those who would consider applying for a new cell service likely won’t benefit from automatically reporting such payments as those with fair/good credit scores and long credit history. To make the best credit building that will not allow one to overspend as well as default on bills, individuals should go for cheaper devices/plans and set an auto-pay function. This means that it is important to assess the carriers and how they report credit before locking into long cell contracts in the name of improving credit scores.
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