Does a Phone Plan Build Credit? How It Affects Your Score

For many individuals, a common question arises regarding the impact of everyday expenses on one’s credit standing. Consistent payments for services like phone plans are a routine part of modern life, leading many to wonder if these regular outlays contribute to building a positive credit history. Understanding how such payments interact with the credit reporting system is important for anyone seeking to establish or improve their credit score.

Phone Plan Payments and Credit Scores

Regular, on-time phone plan payments do not build credit because telecommunication companies do not report positive payment history to the major credit bureaus. Signing up for a postpaid phone plan often involves a credit check, resulting in a “hard inquiry” on your credit report. This inquiry can cause a small, temporary dip in your credit score, but subsequent monthly payments do not appear on your credit report.

However, late or missed phone payments can significantly harm a credit score, especially if the account becomes severely delinquent and is sent to collections. Creditors report late payments to credit bureaus once they are 30 or more days past due. A collection account can remain on a credit report for up to seven years from the date of the first delinquency, negatively impacting creditworthiness.

It is important to distinguish between postpaid and prepaid phone plans. Prepaid plans require payment in advance and do not involve credit checks or report payment history to credit bureaus. This means prepaid plans will neither help nor hurt your credit score. Postpaid plans allow payment after services are rendered and can lead to a negative impact if payments are missed and the debt goes to collections.

How Credit is Typically Built

Credit is primarily built through accounts that regularly report payment activity to the major credit bureaus. These institutions compile credit reports, which are then used to calculate credit scores. The most common types of accounts that contribute to a credit history include revolving credit and installment loans.

Revolving credit, such as credit cards, allows individuals to borrow against a credit limit, repay the amount, and then borrow again. On-time payments and maintaining a low credit utilization ratio, which is the amount of credit used relative to the total available credit, are important for building a positive credit score. A credit utilization rate below 30% is recommended.

Installment loans, including auto loans, mortgages, or student loans, involve borrowing a fixed amount and repaying it in consistent, scheduled payments over a set period. Each on-time payment demonstrates responsible financial behavior, which is reported to the credit bureaus and helps build a solid credit history. Several factors influence credit scores: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and mix of credit types (10%).

Strategies for Building Credit

Since phone plans do not build credit through on-time payments, individuals seeking to establish or improve their credit history should focus on traditional credit products and alternative reporting methods.

Secured Credit Cards

One effective strategy involves using secured credit cards, which require a cash deposit that often serves as the credit limit. This deposit acts as collateral, reducing risk for the issuer. Responsible use, including on-time payments and low balances, is reported to the major credit bureaus. Secured cards are helpful for those with limited or no credit history.

Credit Builder Loans

Another method is a credit builder loan. With this type of loan, the amount, typically ranging from $300 to $1,000, is held by the lender in a locked account while the borrower makes regular payments over a period, often 6 to 24 months. These payments are reported to credit bureaus as an installment loan. Once the loan is fully repaid, the funds are released to the borrower.

Authorized User Status

Becoming an authorized user on another person’s credit card account can also contribute to credit building. The authorized user can benefit from the primary cardholder’s positive payment history and low credit utilization, provided the card issuer reports authorized user activity to the credit bureaus. The primary cardholder remains legally responsible for all payments.

Rent Reporting Services

Finally, some services allow on-time rent payments to be reported to credit bureaus, which can positively impact a credit score. These services may charge a fee, and not all report to all three major credit bureaus. Some services can even report up to 24 months of past rent payments, potentially providing a significant boost to a credit history.