Does Cancelling a Phone Contract Affect Your Credit?

Phone contracts often span a fixed duration, typically 24 or 36 months, and come with specific terms and conditions. A common concern arises when circumstances necessitate ending such a contract early. This article clarifies the relationship between canceling a phone contract and an individual’s credit.

Understanding Cancellation Charges

Canceling a phone contract early often incurs specific financial obligations. One common charge is an Early Termination Fee (ETF), which providers levy to recover costs associated with the initial contract agreement and subsidized device pricing. The calculation of an ETF can vary, sometimes being a fixed amount or prorated based on the remaining months of the contract. For instance, some providers might charge a flat fee, while others reduce the fee as the contract term nears its end.

Another significant financial obligation involves outstanding device payment plans. If the phone was financed through the carrier, the remaining balance on the device typically becomes due immediately upon contract cancellation. Beyond these specific fees, a final bill will also be issued, which may include any prorated charges for services used up to the cancellation date or credits for services prepaid.

Credit Score Implications

Simply closing a phone contract account does not directly impact a credit score. Phone contracts are generally not reported to the three major credit bureaus—Experian, Equifax, and TransUnion—as traditional lines of credit, unlike mortgages or credit cards. Therefore, the act of cancellation itself does not appear on a credit report.

The risk to a credit score stems from failing to pay outstanding balances. If Early Termination Fees, device balances, or final service charges remain unpaid, the account can become delinquent. After a period of non-payment, which typically ranges from 30 to 180 days, the wireless provider may send the unpaid debt to a collections agency.

Once a debt is sent to collections, the collections agency can report the delinquency to the credit bureaus. A collection account on a credit report can significantly lower a credit score and remain on the report for up to seven years from the date of the original delinquency. Unpaid debts can have a lasting negative effect on creditworthiness.

Protecting Your Credit When Cancelling

To safeguard your credit when canceling a phone contract, proactive steps are important. Before initiating cancellation, review your contract terms thoroughly to understand all potential charges, including any Early Termination Fees and the remaining balance on financed devices.

Pay all outstanding balances in full and on time. Settling all charges, such as ETFs and device payments, directly with the provider prevents the debt from becoming delinquent and subsequently being sent to collections. Direct communication with the provider can also clarify the exact final bill amount and payment expectations, helping to avoid misunderstandings.

After making the final payment, request written confirmation from the provider that your account has been closed and that there is a zero balance. Regularly monitoring your credit reports through services like annualcreditreport.com after cancellation ensures that no erroneous negative reporting occurs.

Consider alternative options, such as transferring your service to another individual or exploring options to sell your financed device. These actions can help manage the financial burden associated with cancellation, potentially offsetting costs that might otherwise lead to credit issues.