2 Ways Cell Phones Can Lower Your Credit Score

I’ve gotten a couple of questions from readers asking whether or not a cell phone can hurt your credit. The short answer is yes, it can. Here’s how.

Applying for Cell Phone Service

First of all, let’s talk about getting a cell phone. You’re going to need good credit to get service. Almost all wireless providers check your credit before setting you up with an account. They want to make sure you’re “creditworthy” before “lending” you minutes of airtime. So it’s a good idea to check your own credit history before going to get a cell phone (especially considering that you may be asked for a large down payment or pay more for monthly service if your credit isn’t up to snuff).

This credit check by the wireless provider is the first way getting a cell phone can ding you. Anytime a company makes an inquiry into your credit report, your score suffers slightly. It’s really not a big deal as long as you don’t apply for wireless service from several different providers all at once. That could notably lower your score.

Reporting Your Payment History to the Bureaus

Once you have a cell phone, some service providers do report your monthly payments to the credit reporting agencies. Some, like AT&T, report both your on-time and delinquent payments; Others report only your delinquencies. Before signing up for wireless service, ask the provider its policy on reporting your payments to the credit bureaus. Since payment history accounts for 35% of your credit score, not paying your cell phone bill to the companies that report could significantly damage your score.

Other wireless providers like Verizon and Sprint don’t report any monthly payment history to the bureaus. But that doesn’t mean you’re off the hook. Almost all wireless providers will turn you over to a collections agency if you default on your account entirely. And this collections account will most likely show up on your credit report, dragging down your credit score. AT&T sends you three warning letters before turning your account over to collections; Verizon waits 120 days from the first missed payment.

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The Catch-22

It’s important to have good credit to get wireless service, and it’s important to pay your monthly cell phone bill to maintain good credit. So where does that leave people with bad credit? Consider a prepaid cell phone if you don’t qualify for a traditional plan, or a provider is asking you to pay more for a traditional plan because of bad credit.

The downsides with going prepaid (besides having to pay upfront for your cell phone usage), is that the minutes are sometimes more expensive than traditional plans. Unfortunately, this is just one more example of a catch-22 in which a credit-challenged person is required to pay more for goods and services, making it even harder improve their credit situation. (For more examples of how the poor get poorer, check out this recent Washington Post article on the topic).

But prepaid cell phones aren’t all bad. In fact, many people out there actually prefer them. They come with no commitment, so if you have a problem with the service or cost, you can simply switch providers. And sometimes prepaid plans can save you money, especially if you only use the phone for emergencies, rather than long chats.

Check out 10 other useful secrets the cell phone carriers don’t want you to know. And remember that your cell phone can affect your credit, so it’s important to pay your bill each month.

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