If an outstanding balance is small enough, a creditor may not put much effort into tracking the individual who owes it down, but the organization may still end up reporting the debt to a credit agency. Unless someone is regularly tracking their credit score, these types of small debts may end up going unnoticed and unpaid until the individual applies for a car or home loan. While most people stay on top of credit card debt, unpaid lab bills from a doctor’s visit or late fees from movie rentals may not be on someone’s radar.
In spite of a low dollar amount owed, small unpaid balances can have a substantial impact on someone’s credit rating because credit ratings are determined in part based on whether bills were paid on time and whether they went to collections. The simple act of a $20 past due account going to collections can have a detrimental effect on a credit rating, and the drop in a score can lead to problems getting the a loan with the lowest interest rate possible.
In an effort to help reduce the impact of small debts, the most recent FICO version does not count past-due obligations that are less than $100, but not all lenders are required to follow these standards. People should regularly check their credit scores, using free reports that are available online, and dispute any contested charges as quickly as possible to prevent damage.
If someone finds themselves unable to keep up with bills, it can have a continuous negative effect on their credit rating. Filing for bankruptcy may help people regain control of their finances and in time rebuild their credit score. A bankruptcy attorney can provide information about the process.
Source: FOX Business, “Small Debts Can Lead to Big Credit Score Problems“, Erica Sandberg, July 17, 2014