Beware split tariff mobile contracts if you're about to apply for credit

O2's Refresh tariffs were introduced last year and are what's know as a 'split tariff'. This model separates customers' monthly payments into two portions: one for the monthly rolling airtime plan; the other for the handset cost. Tesco Mobile also offers split tariffs.

O2 and Tesco Mobile say these tariffs give customers more "flexibility to upgrade their phone" as it means you can pay off the remaining handset cost early and get a new phone without having to also pay out an airtime contract – this portion of the agreement continues if the handset is changed.

None of the other major mobile providers offer such contracts.

But with these split tariffs, while the airtime part of the contract shows up as as a normal mobile contract on your credit file, the handset part shows up as a loan, despite the fact there's no interest to pay.

MoneySavingExpert.com managing editor Guy Anker says: "This could take many by surprise, whether they are an existing customer who unexpectedly sees a loan on their credit file, or a new user who has a loan as well as a standard mobile contract on their file.

"The risk of this causing a major problem is low but there is nevertheless a risk, and people should avoiding switching to one of these contracts shortly before a major application, such as for a mortgage, as it is always wise to space out applications in this circumstance."

If you are planning on applying for a credit card, mortgage or loan, lenders could view this need for credit negatively, especially if you're an existing customer who has already defaulted on payments.

Unfortunately, there's not much you can do to avoid this type of contract if you want a newish model of phone on O2, other than pay for your handset upfront. O2 says most newer model phones are only available on Refresh, although some older models are sold on standard tariffs.

Tesco Mobile, however, offer recent model phones on standard tariffs. (See our Cheap Mobile Phones guide to find the best deal).

People 'might see a credit rating fall'

MoneySavingExpert.com asked the two major credit reference agencies what impact they thought a loan account of this amount may create. Experian's James Jones says: "Assuming both tariffs are repaid on time this would generate positive data for the customer's credit history going forward, although in the initial few months they might see a credit rating fall due to taking on two new credit accounts.

"But this is normal and soon reverses once the accounts age and if they're managed well. It's sensible to spread out your credit applications so it would be wise to not apply for any two credit products at the same time if you can avoid it."

Meanwhile, an Equifax spokesperson says: "Prospective lenders will likely view the handset loan in the same way as any other personal loan when assessing an individual's ability to repay.

"Having two separate agreements is unlikely to be detrimental to an individual's credit rating, and the rate of interest for the handset loan will be irrelevant in the context of the credit file. As with all credit agreements, any missed payments or defaults would likely cause concern for a lender.

Credit checking and mobile contracts

Anyone who takes out a mobile handset is likely to be credit checked, which can in itself have an impact on your credit file. This is the case even if you don't end up getting the product.

O2 and Tesco Mobile have both confirmed that anyone applying for a pay monthly mobile contract will be credit checked, although those taking out the split mobile tariffs will only be credit checked once.

With existing customers who upgrade mid-contract, O2 says it won't normally credit check customers again unless they're "significantly" increasing their bill. Tesco Mobile, meanwhile, says customers wishing to upgrade are only credit checked again where there has been a "sufficient length of time" from the previous check.

What O2 and Tesco Mobile say

An O2 spokesperson says: "O2 Refresh separates the device and airtime cost in a whole new way when buying a mobile phone and contract. To enable us to do this, we need to comply with the Consumer Credit Act and customers need to sign a consumer credit agreement about the device payments as well as our standard Pay Monthly Mobile Agreement.

"The two elements are shown separately on the credit record - the tariff as the airtime plan and the phone plan as a loan. Whichever one was paid late/unpaid would have arrears/default loaded but it wouldn't show as a double default."

A spokesperson for Tesco Mobile says: "When a customer chooses an Anytime Upgrade type of contract they are advised that this is a credit agreement as the cost of the handset is spread over a period of time.

"Where we do extend credit, we are regulated by the Financial Conduct Authority and we adhere to the requirements of the Consumer Credit Regulations which require the disclosure of certain key information before entering into a credit agreement with a customer.

"Customers are advised, that with any credit agreement, if they do not make payments in accordance with the agreement then this may affect their credit reference file."