How a small unpaid bill can destroy your credit score

If you have old bills lingering out there somewhere that you forgot about, they could be doing a lot more damage to your financial life than you realize.

Maybe you moved and in the process of switching cable providers, you closed the old account but forgot to pay the remaining balance of just a few bucks. Or maybe you closed a credit card account but didn’t pay the final payment until after it was due. Or maybe a bill simply went to an address that isn’t your primary address and so you never even saw it until months later.

Read more: Credit Score Guide

These types of forgotten and late bills — even for tiny amounts — can do serious damage to your credit score, according to a report by Bankrate.

‘Something seemingly as small as having a low-dollar bill go into collections can have a very large-dollar impact,’ CFP professional Manisha Thakor, director of wealth strategies for women at financial adviser firms Buckingham and the BAM Alliance, told Bankrate.

Potential damage of unpaid bills

If you think a small unpaid bill couldn’t possibly do that much damage, think again.

A forgotten bill for just a few dollars could have a significant impact on your credit score — and that resulting lower score could then haunt your finances for years.

So what started as a balance of just a few bucks could end up costing you hundreds, or even thousands, of dollars down the road — in the form of higher interest rates on things like a mortgage, car loan or other line of credit.

‘If the account goes to collection and it’s reported to the credit reporting companies, how much the debt is is less important than the fact it was unpaid,’ Rod Griffin, vice president of public education at Experian, told Bankrate ‘Whether it’s $50 or $500, the real issue is the debt became a collection account. What lenders want to know is you’ll repay the debt regardless of the size of the debt.’

All it takes is one forgotten bill

Payment history makes up 35% of your credit score — so whether you pay your bills on time can have a big impact on your finances, both now and down the road. Credit scoring models are designed to predict the likelihood that you will default on a debt obligation. So for example, if you have a poor payment history, a mortgage lender is going to take that into consideration when determining the terms of your loan and interest rate.

While some lenders have modified the way they factor in unpaid bills and may ignore those less than $100, many lenders still use scoring models that don’t consider the amount owed on a delinquent account — they just care that it’s delinquent.

Read more: How to get your free credit score

And it doesn’t have to a bill from years ago — according to Bankrate, your credit score could take a hit as soon as a bill is 30 days past due.

In fact, a 30-day delinquency could cause a credit score of 760 to drop by as many as 60 to 80 points, according to a study by VantageScore.

The group also says that the first instance of negative payment information will cause the most severe drop in your credit score. So this is how a $5 unpaid bill can cause someone to go from having a great credit score to having a not-so-great credit score pretty quickly.

And if the unpaid bill is a big one, it can do even more damage, because lenders will factor it in to your credit utilization — how much debt you owe compared with your total available credit. You never want to be using more than 30% of your available credit at any one time, and if you have a big unpaid bill out there, you could be ‘using’ a lot more of your available credit than you realize — which can damage your credit score even more.

What you have in the bank may not matter

Don’t assume that having tons of money in the bank can fix all your problems.

‘In today’s lending environment, being high-earning and/or wealthy isn’t always enough to get the best interest rate,’ says Thakor. ‘You have to have a demonstrable track record of good credit behavior as well.’

If your credit score gets dinged by a tiny old unpaid bill, it could cause you to pay higher interest rates on big purchases in the future — and a quarter or half of a percentage point could mean a big difference in payments.

How to prevent it from happening to you

Your credit score can impact several areas of your life, including potential job offers, insurance rates, credit card rates, mortgage rates and rate on other loans.

So if you want to get your financial life in order, it’s important to keep up with your credit score and the factors that impact it. Even if you’re a little nervous to check, you have to know where you stand financially in order to get on the right track — and stay on the right track. Plus, there could be errors on your report that are negatively impacting your score without you realizing it.

So here are some things to know about keeping up with your credit score and credit report — and how to get on the right track:

All Americans are entitled to one free credit report from each of the three major credit reporting agencies upon request every 12 months. Here are several ways you can request yours.
There are a few different ways to get access to what’s considered your official credit score — your FICO score — which often involve a small fee. But there are other free options that allow you to keep up with your non-FICO score, which is a great way to do status checks and monitor how you’re doing if you’re trying to improve your credit score.
Once you get an idea of where you stand, you can start taking steps to improve your score. Here’s a guide on how to get started.

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