New Credit Scoring Forgives Small Debt

By Reyna Gobel AAA

Are you worried that an $80 cable bill that you forgot to pay five years ago will haunt you forever? Well there's no need to worry since 2009's release of FICO08. In 2009, FICO08, the latest version of the FICO scoring system hundreds of lenders use to verify your credit rating, included this adjustment that could boost your score if you're a responsible credit user. (For more, read The Importance Of Your Credit Rating.)

Small Collections No Longer Impact Scores
Even if your $80 collection has now grown to $300, it will no longer impact your FICO score. And it doesn't matter how old or new the debt is. The key to your collection not impacting your score is that the amount started under $100. It doesn't matter if the collection occurred yesterday or five years ago.

For example, when you cell phone went to collections three years ago, the bill was $88. After three years of interest and fees, you now owe $198. The collection will not impact your FICO score.

However, though this small collection won't affect your credit score, credit reports will still show collections of any size. For any line of credit where a lender looks at your credit history in depth, such as for a mortgage or for some car loans, they would notice an overall pattern of collections.

An Example
Let's say you were unsatisfied with your water delivery company, your cable company and a product you ordered that was $19.95. You decided not to pay any of these bills, since it won't impact your FICO credit score if any of these companies decide to report the lack of payment to the three major credit bureaus. Your mortgage broker notices a pattern of unpaid bills on your credit reports and denies your mortgage application.

Larger Collections Still Count
While small collections affecting your score are in the past, larger collections affecting your score aren't. If you have any collections that began at $100 or more, your score still could be affected significantly.

FICO scoring is a complicated scoring system that evaluates all your debt: credit cards, debt collections, personal loans, student loans, mortgages and more. The goal in scoring is to give lenders an overall picture of how you use your credit.

Thus, how a larger collection affects your score depends on how recently your collection was and what the rest of your credit history looks like. (For more, see How Is My Credit Score Calculated?)

The first factor is age of your collection. One that happened yesterday will affect you more than one happened two years. Every passing month can improve your score.

The other is the size and quality of credit history. Let's say the collection you have is for $101 from a charge off of the only credit card you've ever had. The collection will knock down your collection quite a bit.

On the other hand, let's say you have another credit card on your report that you've never missed a payment on in 10 years. The collection will affect your score a whole lot less. If you have a mortgage or a car loan in addition to these cards without missed payments, you'll be in even better shape.

Build Good Credit
Whether your collections are old or new, small or large, the best thing you can do for yourself and your credit is making a commitment to building your credit history now. The easiest steps to this are:

  • Don't miss payments.
    While one missed payment may or may not hurt your credit score if you have a history of on-time payments, a pattern of missed payments will. So, if you get into a pattern of always making your payments on time, you won't have to worry about the impact of each missed payment on your credit score. (Learn more in How To Establish A Credit History.)
  • Keep your credit cards under the 15% mark of your credit limit.
    How close you are to your credit limits composes nearly a third of your credit score. While 15% isn't the definitive number for having a great credit score, it is a good number to strive to achieve. For instance, if you have a card with a $1,000 credit limit, try to lower your balance to $150 or less. If you can't get your balances below 15% tomorrow, set a goal to decrease your balance by a few dollars each month.
  • Don't apply for several new cards at once.
    Beyond the impact on your credit score, applying for a few credit cards at once looks bad to lenders who wonder why you want so much new credit at once. Research new cards before applying, so you get a new one that makes sense for you.

Conclusion
FICO08 solves the problem of small collections weighing down your credit life, but you have to have good overall credit usage habits to have a great score.
For further reading, checkout How A Bad Roommate Can Ruin Your Credit Score, Combining Credit For A Happy Financial-Ever-After, Free Financial Counseling Programs For Students and Consumer Credit Report: What's On It.

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