There have been dozens of stories in the press about lost mortgage offers because of defaults on mobile phone contracts. Dreams of home-ownership in tatters. Or a higher price and fees via a broker await.
Defaults are one of the most common reasons for refusing a home loan. And these marks stay for at least six years on your credit file.
Really the problem lies with inefficient credit assessment. Automating declines without regard for the context in which a debt has arisen.
For lower-income borrowers a mobile phone default can mean further reduced credit choices, higher interest rates and oppressive terms and conditions.
On average, for loan applications under £1,000, a quarter of all telecommunications accounts going through the NestEgg Decision Engine are showing a default.
In such cases should you accept? When should you decline?
If telecommunications accounts are the only defaults on the credit account, this could indicate a dispute rather than an incapacity to pay the bill. It can also be a manifestation of consumer impatience.
Roaming into a dispute
Telecommunications defaults often relate a mobile phone.
45 per cent of consumers say they have had a bad experience with a mobile phone operator.
Citizens Advice deal with over 40,000 complaints about mobile bills each year. They believe that up to 8 in 10 people are paying a significantly higher price, for remaining with their existing supplier.
Ofcom handle 3,000 complaints each month. And these are just the issues that reach the regulator. Thousands more are dealt with internally by the provider.
Larger than expected bills can lead to a dispute, including roaming charges and excess paid-for data consumption. Going just a few megabytes over your allowance can be very expensive. Roam on a cross channel ferry or in Turkey and you could end up paying hundreds.
A default might be caused by a dispute over terms and conditions. 80% of respondents to a survey by Deloitte said that they accept terms and conditions on their mobile phones most of the time without reading them. Does this extend to the mobile contract itself? Are customers falling out with their provider because there were unclear about the terms and conditions?
One in ten people that had a bad experience changed operator. This can be before the end of a contract with that supplier. Consequently a default can result.
And then there’s disputes about credit reports themselves. Citizens Advice have noted that there is poor notification of actions being taken by a mobile phone operator, particularly around credit history ‘black marks.’ One former mobile phone call centre operator told NestEgg that the ability to record a default against a customer moaning at the end of the line, was also known as the F**k you button.
Fear of Missing Out and Consumer impatience
4 out of 10 of the 80 million mobile phones are pay monthly contracts. Of all smartphone owners 60% have had their handsets in the last 18 months. 10% are checking their providers website every month to look at new devices.
Recently though, phone replacement has slumped. In 2013 consumers bought a new phone every 20 months. Now they buy one every 29 months.
However the average phone lasts 15 months before it is broken, lost or stolen. Contracts for the best handsets last 24 months. Loan applicants may decide to stop paying one contract and move onto a new one.
Who’s to blame?
Ownership of top-ranking devices transcend income deciles. This is one of the big advantages of accessing mobile phone services using pay monthly. It would be surprising if fewer than 40% of visitors to a credit union website weren’t using iPhones to browse. Apple and Samsung devices will probably account for 8 in 10 visits.
Furthermore, it is unlikely that people will want to give up the ability to have a mobile contract. Mobile phones are essential for people in low-income households. They are 4 times more likely to use a mobile as their only form of telecommunications than those in the highest-earning households.
Each case is unique, but its undoubtable that many defaults arise from consumer disputes and dissatisfaction rather than an inability to pay. If someone wants to cancel a contract and there’s still something left to pay, they can easily end up with a default on their record. This will last 6 years.
Inability to pay
The above focus on disputes shouldn’t mean that a change in circumstances is ignored. Many contracts last two years. Being in and out of work can mean that the bills become unaffordable. However this is unlikely to happen in isolation. If the credit report shows multiple missed payments or defaults on other account types, especially credit cards and loans – then there’s an issue.
A clear majority of telecommunications defaults occur without missed payments on other accounts. .
Sometimes there can be a mix of mail order and mobile phone defaults. We’ll be looking at another subtle blend of social need, disputes and arrears next time; mail order.