Editorial Policy

Do I Have to Worry About This Tiny Debt?

Erica Sandberg

June 13, 2013

QDear Erica,

I have a collection account on my credit report, but it's only for $150. How bad is it for my credit? It's for something that I forgot about last year. What should I do now, Erica? — Tyson

AHi Tyson,

I'm sorry, but a debt of any sum that has been charged off by the original creditor (such as a credit card company, department store or doctor's office) and then sold to a collection agency does have a major impact on your credit report and scores. That's why it's so important to keep all accounts in good standing. Everybody has forgetful moments, but when it comes to bills, the repercussions for losing track of them can be severe.Ask Erica

But, as you say, the amount you owe is so small! How bad of an effect can it have? A lot, actually. For a FICO score, which is the most widely used of all scoring methods, all debts over $100 that are in collections are weighted the same in your payment history, the biggest chunk of a FICO score. The most recent version of the FICO scoring model doesn't differentiate, so your $150 balance may as well be $1,500 for all the damage it's doing to your scores.

What does matter is time. Newer debts are factored in more heavily than those that are much older. And a paid debt will always look better than one that is outstanding. The first 24 months are the most significant. Because the account in collections is only a year or so old, it's causing your FICO scores to plummet.

You have to think of these credit ratings from a lender's perspective. As a business, they want to know if you've been paying your bills on time. If you have, their risk in extending a loan or line of credit to you is decreased. Problems (like forgotten bills that the company had to take a loss on) that occurred years ago can be forgiven, especially if you've borrowed and repaid responsibly since then. However, those in the recent past spell current trouble — and lenders are wise to be wary. After all, if you didn't pay that company, how can they be confident that you'll pay them?

Don't worry, though. There is much you can do to turn your scores in the right direction. Because a good credit report (from which your credit scores are derived) is dependent on a perfect payment pattern, start now. Write a check for the outstanding obligation and send it to the collection agency immediately. Once it's noted on your credit report that you've satisfied the liability, your credit scores should increase. The fact that the account was charged off will continue to be listed for seven years, but as that account ages, its impact will lessen until it finally drops off your reports and is no longer a factor at all.

In the meantime, if you have a credit card, use it regularly and responsibly to add positive data to your reports. If you don't have a credit card, consider getting one. I recommend secured credit cardsto people who are trying to reestablish their credit. They're easier to qualify for because you put down a cash deposit that the lender keeps as collateral, which lowers its lending risk. Whichever type of card you have, by paying on time (every time) and keeping your overall debt low (or at zero), you'll be proving that you've left the past behind.

Got a question for Erica? Send her an email.