Does Getting a Phone Plan Build Credit?

A credit score serves as a numerical representation of an individual’s creditworthiness, playing a significant role in various financial aspects of life. This three-digit number influences the ability to secure loans, rent an apartment, or even obtain certain employment opportunities. Many people wonder about the factors that contribute to this score and whether everyday financial commitments, like phone plans, play a part in its construction.

Phone Plans and Credit Building

Regular, on-time payments for cell phone service do not contribute to building a positive credit history. Major phone carriers are service providers, not financial lenders, and typically do not report positive payment activity to the three major credit bureaus: Equifax, Experian, and TransUnion. Therefore, consistently paying your monthly phone bill will not directly increase your credit score.

Indirect Credit Impact

While positive payment behavior for phone plans does not typically build credit, negative actions can certainly harm it. If a phone bill becomes severely delinquent, meaning payments are missed for an extended period, the account may be sent to a collection agency. This usually occurs after a period of several missed payments, often around 180 days.

Once an account goes to collections, the collection agency can report this derogatory mark to the major credit bureaus, damaging a credit score. This negative information, including collection accounts, can remain on a credit report for up to seven years from the date of the first missed payment that led to the collection process. This can make it more challenging to obtain new credit, loans, or housing.

Effective Credit Building Strategies

Since phone plan payments do not directly build credit, focusing on recognized strategies is important. One effective method is using a secured credit card, which requires a cash deposit that acts as the credit limit. Responsible use, such as keeping balances low and making on-time payments, is reported to credit bureaus and can help build a positive payment history.

Another strategy involves credit-builder loans, which function differently from traditional loans. With a credit-builder loan, the borrowed amount is often held in a savings account or certificate of deposit by the lender until the loan is fully repaid. As the borrower makes regular, on-time payments, these are reported to the credit bureaus, establishing a payment history. Once the loan term concludes, typically ranging from six to 24 months, the borrower receives the saved funds, minus any interest or fees.

Becoming an authorized user on another person’s credit card can also aid in credit building, provided the primary account holder manages the account responsibly. While the authorized user benefits from the primary user’s positive payment history and low credit utilization, irresponsible behavior by the primary cardholder could negatively affect the authorized user’s credit.

Traditional credit cards are a common tool for building credit when used judiciously. Making small purchases and paying the full balance by the due date each month demonstrates consistent financial responsibility. Maintaining a low credit utilization ratio, generally below 30% of the available credit, is also beneficial. Installment loans, such as auto loans or student loans, can also build credit through consistent, on-time monthly payments. Payment history is a significant factor in credit scoring models, accounting for approximately 35% of a FICO score.