Can Breaking My Cell Phone Contract Hurt My Credit Rating?

While breaking a cellphone contract is rarely easy, you should also be aware of how doing so can affect your credit rating. Generally, cellphone companies charge a penalty for terminating your agreement early, often with additional termination penalties and fees for failing to abide by the terms of the contract. If you don't pay up, it's a pretty good bet you're going to find yourself with a negative entry on your credit report.

TL;DR (Too Long; Didn't Read)

As long as you pay any fees and penalties you might owe for ending the phone contract, you should not see an impact on your credit score.

Breaking Your Contract

If you aren't happy with what you have but still have time left on your cellphone plan, you can break the contract by paying an early termination fee. You'll likely pay between $175-$350 to get out of a cellphone contract, but it depends on the company and the terms of your agreement.

Short of dying or joining the military – permissible excuses for canceling – a cellphone company may allow you to cancel your contract for moving to an area where reception is poor or for continual service disruptions. Contracts vary, however, and many providers don't guarantee the quality of the wireless service. Even if you think you are getting poor service, not paying the early termination fee will affect your credit in the same way not paying any other bill will.

Your Payment History

Not all cellphone providers report your history of timely payments to the credit reporting bureaus, but some do, which can actually help your credit score. Others will report only a delinquent payment history, and most will turn your account over to a collection agency if you break your cellphone contract and stop making your monthly payments. Your credit score will drop when delinquent or collection accounts appear on your credit report.

Your Credit Score

Your payment history makes up the biggest percentage of your FICO credit score. Payment history consists of properly paid accounts as well as any delinquent or past due accounts, including accounts that go to collection. Late payments lower your score, and collection accounts on your credit report will lower it even more. Further, both the original account and collection account will remain on your credit file for seven years.

Despite whatever circumstances surround it, a negative entry on your credit report will indicate to creditors that you didn't meet the terms of the contract into which you entered. Therefore, keep your credit history intact by continuing to pay the fees you owe even if you are disputing the terms of your cellphone agreement.

Alternatives to Breaking Your Contract

To protect your credit, read your cellphone contract carefully before signing. Pay particular attention to whether the company charges an early termination fee. Many cellphone companies now reduce the early termination fee by a specific dollar amount each month over the life of the contract, costing you less money the later you cancel.

Other alternatives to signing a contract include using a prepaid service or purchasing a cellphone at full retail price and being billed for service charges monthly.

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