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Terminating a Contract Early Have Adverse Impact on a Credit Report

By Faye Mergel
Published: Wednesday, January 13th, 2010

Getting out of a contract early can mean being free from another financial obligation. However, specialists warned that early termination fees can have adverse impacts on a credit report and can cost consumers a lot more than they think.

As consumers get squeezed for cash in the unpredictable economy, many of them are looking to terminate contracts early to give themselves more room financially. Cutting cellular phone plans, cable services, or gym membership is one of the first things consumers do when they want to cut back on their spending.

However, before they are able to get out of their contracts, finance advisers remind consumers that contractors, whether they are cellular providers or cable companies, charge fees when a contract is terminated early. Refusing to pay those early termination fees could adversely impact a credit report for as long as seven years.

Experts say consumers who get huge discounts upon signing up for a cellular service, for instance, can expect huge early termination fees if they end their contract early. They explained that cell phone providers such as Verizon, AT&T, and Sprint usually offer huge rebates when consumers sign up with them. To regain the discount they have given earlier, contractors charge consumers with early termination fees. Most likely, termination fees come when there is a sale or promotion when the consumer signed up for services. Experts warned that such fees can be huge and are usually equal to the discounts given upon contract signing. If unpaid, those fees will be recorded on a credit report, which will consequently make it difficult for a person to get loans at lower interest rates.

Specialists suggest weighing the savings against the penalty that will be incurred when deciding whether to terminate a contract early or not. If consumers can stay on their contract a little longer, then it might be best to do so. They note that early termination fees are most likely to decline when a person stays longer on his contract. In many cases, such fees go down after the contract reaches three months.

Experts also say some contracts give consumers a grace period so they can opt out of a deal without being charged with early termination fees. Verizon and Sprint give subscribers thirty days upon signing to cancel a plan without incurring penalty. For Verizon subscribers who terminate their accounts after the grace period, they will be charged with $175 if they are stand users or $345 if they are using smart phones.

Consumers are advised to weigh out the consequences before terminating a contract so they can avoid damaging their credit report.

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