credit & debt

How Unpaid Debts Affect Credit Scores

Having a bill in collection won't necessarily hurt your score.

I recently received a letter from a collection agency that is trying to collect on a bill of about $9 from five years ago. Will this affect my credit score, which is currently fine? Is there a statute of limitations for collecting on old debts?

Having a bill go to collection can have a big impact on your credit score -- especially if you have a high score now. But FICO, the company that developed the commonly used FICO score, changed its calculations in 2009 to disregard collection accounts and other dings on a person’s credit file when the original balance owed is less than $100.

Not all lenders use the new version of the FICO score -- some (including many mortgage lenders) use the older version, which counts unpaid debts of all amounts. In that case, the bill in collection could hurt your score.

There are several kinds of credit scores with slightly different calculations, but they’re all based on information from your credit reports from the three major credit bureaus (Equifax, Experian and TransUnion). It’s important to monitor the reports to see if any negative information, such as a collection account, turns up. See Conflicting Credit Scores and Understanding Credit Scores for more information about the different kinds of credit scores.

Collectors can try to get the money indefinitely, but if a collection account appears on any of your credit reports, the credit bureau must drop it from the report after seven years from the date of the original default, says John Ulzheimer, president of consumer education at SmartCredit.com. It’s possible that the unpaid bill has not been reported to any of the bureaus. Paying the collection agency won’t start the clock ticking again, but it may put the debt on a report, where it will remain until the time limit expires in two years, says Ulzheimer.

He recommends that you check all three of your credit reports to see if the debt is now being reported as an unpaid collection (you can check each report free every 12 months at AnnualCreditReport.com, and ask the collector whether or not it will report the collection account when it is paid. “Get any commitment to not report it in writing or via voice recording,” he says.

For more information about credit scores, see 6 Things to Know About Credit Scores.

Most Popular

Don’t Be Tricked into Voluntarily Paying Higher Taxes on Your IRA
IRAs

Don’t Be Tricked into Voluntarily Paying Higher Taxes on Your IRA

Traditional IRAs are set up in a way that basically incentivizes you (and your heirs) into paying the highest tax bill possible. Don’t fall for it. Co…
July 4, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Retirees, Make These Midyear Moves to Cut Next Year's Tax Bill
Tax Breaks

Retirees, Make These Midyear Moves to Cut Next Year's Tax Bill

Save money next April by making these six hot-as-July tax moves.
July 1, 2022

Recommended

Financial Advice from America’s Founding Fathers
credit & debt

Financial Advice from America’s Founding Fathers

What money-management guidance can we glean from the words — and experience — of Benjamin Franklin, Thomas Jefferson, Alexander Hamilton and others?
June 30, 2022
When Will Student Loans Be Forgiven?
Paying for College

When Will Student Loans Be Forgiven?

Millions of Americans are waiting for the Biden Administration’s next hint, which could come later this summer, at how he’ll address the student loan …
June 27, 2022
Beneficiary Designations: 5 Critical Mistakes to Avoid
retirement

Beneficiary Designations: 5 Critical Mistakes to Avoid

You may be surprised at how easy it is to make an expensive mistake with your beneficiary designations. Here's how to help avoid the five most common …
June 6, 2022
30 Best Kirkland Products You Should Buy at Costco
Costco

30 Best Kirkland Products You Should Buy at Costco

Many of warehouse club Costco's store-branded Kirkland Signature items get high marks for quality and value. Check out our picks.
June 3, 2022