The transition of smartphones from luxury to necessity is both fascinating and terrifying. Roughly 96% of Americans own a smartphone in 2023. A far cry from the 35% of American smartphone users in 2011.
Smartphones add so much value and convenience to our lives. But such a steep price tag for what is essentially a requirement for modern-day life is problematic, to say the least.
So it’s not a surprise when most people decide to use a financing option for their smartphone purchase. Considering the risks associated with financing a smartphone, paying on time should also result in increased credit.
Does Financing a Phone Build Credit?
Quick Answer: Yes, as long as you choose a financing option from a lender that reports your data to the credit bureaus. For example, financing through manufacturers like Apple or Samsung will build credit if you make your payments on time. While most point-of-sale financing from retailers, won’t build credit.
Why Don’t All Phone Financing Options Build Credit?
The simple answer is that not all companies want to go through the hassle of reporting your payment history to the credit bureaus. In fact, when you miss your payments to wireless carriers or retailers, they just send your debt to collection agencies. And it’s those in collections that report your missed payments to the credit bureaus.
Phone Financing Options that Build Credit
- Smartphone Manufacturer Financing
- Buy Now, Pay Later (BNPL) + Cushion App
- Personal Loan
Smartphone Manufacturer Financing
Financing offered by phone manufacturers is often done by opening a Line of Credit (LOC) for you. An LOC is an agreement between you and a bank regarding the maximum amount of money you can borrow.
Since this requires manufacturers to partner with banks, records of your transactions will be reported to credit bureaus. This is a double-edged sword, however. Missing payments will cause your credit score to drop.
Another downside to this process is the hard credit inquiry that the bank needs to make before opening a line of credit for you. Too many hard inquiries in a short period of time will hurt your credit score.
Each hard inquiry stays on your credit report for 2 years so keep that in mind when applying for this financing option.
BNPL + Cushion App
Buy Now, Pay Later (BNPL) is a financing option that has gained a lot of popularity during the pandemic. Like other point-of-sale (POS) financing options, BNPL providers usually don’t report your payment history to the credit bureaus.
The upside is that they provide 0% interest payment plans and they usually only do a soft credit check which has no negative impact on your credit score.
Better yet, if you use the Cushion App to manage your BNPL payments, Cushion will report your transactions to Experian, increasing your credit score in due time.
Personal Loan
As mentioned above, banks will report your data to the Credit Bureaus. So taking out a personal loan in order to fund a smartphone purchase has the potential to build your credit.
However, this is without a doubt the worst of all the listed credit-building options. The other options in this list either offer 0% interest or low-interest plans. While taking out a personal loan will typically net you a 6% to 36% interest deal.
In fact, if you were denied financing by a major phone manufacturer, chances are your credit isn’t enough to get you a personal loan with decent terms.
Alternatives to Financing a Phone for Credit Building
Smartphone Lease
Renting a phone might be a weird notion but it has its uses. With planned obsolescence being so prevalent in tech products these days, leasing has become a more attractive option.
Lease payments are also reported to the credit bureaus and since this is a cheaper option than financing, it’s easier to build credit this way.
Leasing a smartphone is also great if you’re holding off until the next big smartphone release of your favorite brand. After all, why settle for second best?
Credit-builder Loan
If your credit isn’t good enough for the options mentioned above, your only recourse is to save up the money required to buy the phone outright. But fret not because you can also build credit this way by applying for a credit-builder loan.
Credit-builder loans are designed for people who are struggling with their credit. And the requirements for them are quite lax since they are secured debts.
What are Credit-Builder Loans Anyway?
They’re not really loans in the traditional sense. Since you don’t get the loaned amount until you’ve repaid your debt.
It sounds crazy, we know. But its sole purpose is to build your credit. And if you’re going to save up for a phone anyway, might as well build credit at the same time.
So instead of depositing money in a savings account or a piggy bank, you’re going to make repayments instead. Just be sure to loan the right amount for your smartphone purchase and choose a repayment plan that works for you.
How Does Phone Financing Impact Credit Score?
Hard Credit Inquiries
As mentioned earlier, some financing options place hard inquiries on your credit. This isn’t a bad thing on its own since financial institutions need to do their due diligence.
The problem with hard credit inquiries is that they stay on your credit report for a long period of time. And since the number of hard credit inquiries reflects badly on your credit score, it’s easy for this to snowball into a problem without your notice.
To mitigate this, keep track of the financing options that place hard inquiries on your credit and try to limit them accordingly.
Positive/Negative Payment History
Your payment history accounts for 35% of your credit score. So making your payments on time has a huge effect on your credit-building endeavors.
The unfortunate fact about phone financing is that most of the options available won’t help you build credit. But if you miss your payments, your account could get sent to collections and damage your credit.
This is why it’s imperative to choose the financing options that report all of your data to the credit bureaus and not just the negatives.
Will Paying My Phone Bill Build my Credit History?
Yes, but only through Bill Pay apps like Cushion. By activating your Cushion card and putting it on file with your billers, your bill payments will automatically be reported to Experian, one of the three major credit bureaus.
Frequently Asked Questions
Can financing a phone improve my credit score?
Yes, as long as you choose a financing option from a lender that reports your data to the credit bureaus.
What is the difference between financing and leasing a phone?
Financing is when purchase something by taking on a debt that you will repay over time. While leasing is an agreement to rent the product for a certain period of time.
What is a Hard Credit Inquiry?
A hard inquiry is made when a financial institution checks your credit score to determine whether you’re eligible for the financial product you applied for. Multiple hard inquiries in a short period of time could be interpreted as someone trying to
What is a Line of Credit (LOC)?
A Line of Credit is an agreement between you and a bank regarding the maximum amount of money you can borrow.
How long does it take for phone financing to impact my credit?
How quickly you see an impact on your score will vary and depends on many factors. However, if you use the BNPL + Cushion App option, most of our users see an impact on their score within 3 months of signing up.
What happens if I miss a phone financing payment?
Your credit score will be affected negatively, regardless of which financing option you choose.
Can I finance a phone if I have no credit history at all?
Probably not. Most if not all financing options for phones are unsecured. Financial institutions are pretty strict about their requirements for unsecured loans.
Will financing a phone affect my credit negatively if I already have a good score?
Yes, missing payments will affect your credit score negatively. This is true for all loans that you need to repay.
How can I check if my phone financing is being reported to credit bureaus?
Everyone gets a free weekly credit report on AnnualCreditReport.com. Just look for the credit tradeline for your phone financing option.
What should I do if I notice errors on my credit report related to phone financing?
You can mail a dispute letter to the credit bureau that published the erroneous credit report.
Are there any specific phone financing plans that are better for credit building?
Phone manufacturers provide the only phone financing plans that can build credit on their own. BNPL, however, can help build your credit profile when combined with the Cushion app.
Will my credit score drop if I cancel my phone financing plan?
Yes, defaulting on a loan and closing an account will cause your credit score to drop.
Conclusion
Cellphone financing can help you build your credit as long as you choose a financing option from a lender that reports your data to the credit bureaus. The phone financing options that will build your credit are Smartphone Manufacturer Financing, Buy Now, Pay Later (BNPL) + Cushion App, and Personal Loans.
