Does Leasing a Phone Help Build Credit?
Clarify how leasing a phone influences your credit score. Understand its limited impact and find practical strategies for effective credit building.
Leasing a mobile phone is a common consumer agreement, but its impact on credit scores is often misunderstood. While some financial products are designed to build credit, phone leases typically do not. Understanding how financial arrangements influence credit scores is important for managing personal finances.
The Nature of Phone Leases and Credit Reporting
A phone lease is a rental agreement for the device, rather than a loan for its purchase. Under such an arrangement, a consumer makes regular payments to use the phone for a set period without owning it outright. The lessor retains ownership. This differs significantly from purchasing a phone through an installment plan, where payments contribute to eventual ownership.
Most phone lease agreements do not routinely report positive payment history to the major credit bureaus. Unlike traditional credit accounts, these lease payments are generally not considered credit obligations that build a positive credit profile. This means that consistently making on-time lease payments typically will not appear on a credit report to improve a credit score. While some leasing providers might report payment progress, this is not a widespread practice for phone leases.
How Credit is Built
Credit scores are numerical representations of an individual’s creditworthiness, influenced by several factors reported to credit bureaus. Payment history is the most significant factor, accounting for approximately 35% of a FICO Score, indicating whether past credit accounts have been paid on time. The amounts owed, or credit utilization, makes up about 30% of the score, reflecting how much available credit is being used. The length of one’s credit history, including the age of accounts, contributes around 15% to the score. New credit applications and the types of credit in use, known as credit mix, each account for about 10%.
Common types of accounts that contribute to building credit include revolving credit, like credit cards, and installment loans, such as mortgages, auto loans, student loans, or personal loans. These accounts are routinely reported to credit bureaus, allowing for the establishment of a comprehensive credit history.
When a Phone Lease Can Affect Credit
While a phone lease typically does not contribute to building positive credit, it can negatively impact a credit score if payments are missed. If a lessee fails to make payments, the account can become delinquent. Accounts unpaid for an extended period may be “charged off” by the original creditor. A charge-off signifies that the debt is deemed uncollectible by the creditor, though the consumer remains legally responsible for repayment.
When an account is charged off or significantly delinquent, the original creditor may sell the debt to a collections agency. Collections agencies can report this negative information to the major credit bureaus, which can severely damage a credit score. These negative marks, including charge-offs and collection accounts, can remain on a credit report for up to seven years from the date of the first missed payment. This adverse reporting can make it difficult to secure new credit or loans in the future.
Effective Strategies for Building Credit
Given that phone leases generally do not build positive credit, individuals seeking to establish or improve their credit scores have several more effective avenues. One common strategy involves obtaining a secured credit card, which requires a cash deposit that acts as the credit limit. This deposit minimizes risk for the issuer, making these cards more accessible for those with limited or no credit history. Responsible use, including on-time payments and keeping balances low, is reported to credit bureaus and can help build a positive payment history.
Becoming an authorized user on a trusted individual’s credit card can also be beneficial. This allows an individual to gain a credit history from the primary cardholder’s account activity, provided the issuer reports authorized user activity to the credit bureaus. However, the authorized user’s credit can be negatively affected if the primary account holder misses payments or maintains high balances.
Another option is a credit-builder loan, where the loan amount is held by the lender while the borrower makes regular payments. These payments are reported to credit bureaus, and the borrower receives the funds once the loan is fully repaid, simultaneously building savings and credit. Consistently paying other bills that report to credit bureaus, such as student loans, auto loans, or even some rent payments through specialized services, also contributes to a positive credit history.