How Your Phone Plan Can Affect Your Credit Score

Author: Kate Browne

From social media to fitness apps and Internet banking, it’s hard to get by without a smartphone these days. And while they save endless amounts of time and help us stay connected, thousands of Aussie consumers are running into telco debt. And that problem is starting in-store.

A recent investigation by the Telecommunications Industry Ombudsman (TIO) found that common telco sales practices are causing thousands of phone users to run up bills they can’t afford.

The findings revealed that in some cases, sales staff were more focused on achieving their own targets than setting customers up with a suitable product. It also found that some telcos were selling multiple devices to consumers without checking their ability to cover the extra costs.

How this affects your credit score

If you fall behind in paying your phone bill, this will put your account into arrears. If you’re in arrears for more than 60 days and owe $150 or more, this will be listed as a default. Defaults drag down your credit score and hang around on your credit report for five years.

Not only can this prevent you from applying for other phone plans down the track, it can also impact your ability to be approved for a home loan or a credit card. This means your phone bill woes can be a slippery slope to bigger finance issues further down the track.

Almost everyone who falls behind on their phone plan starts off with the best of intentions to pay it back but how can you prevent it from happening in the first place? Here are a few suggestions to help you out (you’ll need to pause that cat video and pay attention).

Stick to prepaid

Aah, the humble prepaid plan. It might evoke memories of early high school, but prepaid is the most effective way of preventing bill shock. As soon as you’ve reached your data limit your access to the Internet is cut off (but you’ll still be able to use Wi-Fi). There’s no shortage of prepaid plans on offer either. Most include unlimited calls and texts, and range from around $5-$100. When it comes to money, prepaid will always have your back.

Set a data limit

Some smartphones come with a setting that allows you to set your own data limit. This can prevent you from going over a specific amount. If you switch this setting on, your phone will automatically turn off mobile data access when you’ve reached your limit. This means you can use your device without worrying about any excess data charges.

Pay for your phone outright

Many people will jump on a plan if it means they can get their hands on the latest device without paying up-front. After all, new release smartphones aren’t cheap, with some costing upwards of $1,500. A plan gives you the option to pay off the device in smaller installments along with your bill each month. But this is where people can often be blindsided.

To avoid being caught out, pay for your phone up-front. This means you’ll either need to save up over time or buy a less expensive model. This might sound like tough love, but you can save yourself a whole lot of financial hassle down the track – and protect your credit score in the process.

Take a friend with you

Salespeople are notoriously persuasive – it’s their job! Surrounded by shiny new phones and convincing staff, it’s easy to be sweet-talked into bigger plans or fancy upgrades. As the TIO investigation revealed, in-store is where the problem starts.

If you’re shopping around for a new phone, take a straight-talking friend or family member with you to ask the hard questions. How much will the late fees be? Can you afford to cover repayments if you lose your job? What happens if you break the contract early? Make sure they know your financial limits and are prepared to speak up on your behalf. This will stop you from signing any dotted lines in a hurry.

It’s tempting to sign up to a lengthy plan if it means you’ll be the proud owner of the latest iPhone. But this can come with financial consequences if you can’t meet your repayments. Telcos can sometimes try and sweet-talk customers into biting off more than they can chew, so it’s important to be reasonable about what you can – and can’t – afford. Even better is if you do, your future self will be thanking you.