How Unpaid Debts Affect Credit Scores

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.

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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.