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.

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.

Related Articles
  1. Stock Analysis

    Best Stocks to Buy for Around $1 (NXTD, MBII)

    Watch for strong technical indicators and other positive information when considering the purchase of any stock trading in the $1 range.
  2. Home & Auto

    Don't Be the Victim of Auto Loan Rip-Offs

    Subprime auto loans – and 60-day delinquencies – are up. These 4 signs of predatory auto loans can tip you off before you're caught in one.
  3. Credit & Loans

    10 Reasons To Use Your Credit Card

    There are several benefits to paying with credit instead of debit, if you use a credit card responsibly.
  4. Credit & Loans

    5 Extreme Ways To Raise Your Credit Score

    Desperate to rebuild your credit score because you can’t obtain a loan with a decent interest rate? Here are some extreme options to try.
  5. Personal Finance

    The Top 5 Personal Finance Experts to Follow in 2016

    Here is a look at five money and investing experts who can help you reach your financial goals for 2016.
  6. Economics

    What is a Trade Credit?

    Trade credit means that a customer purchases goods from a seller who allows the purchaser to pay for those goods at a later time.
  7. Retirement

    7 Ways to Use a Strong Credit Score During Retirement

    Find out why it is important to maintain a good credit in retirement. Learn seven reasons not to leave your credit score behind when you retire.
  8. Investing

    Amazon Financing Now in the U.K.: Is America Next?

    Amazon has unveiled a great credit product in the U.K. Will America be the next country to have access to this financing option?
  9. Credit & Loans

    Why You Should Use Your Credit Card For Purchases

    Responsible credit card users who always pay off their monthly balances should use their cards to buy everything.
  10. Retirement

    6 Methods to Maintain a Healthy Credit Score During Retirement

    Learn how to improve your credit score during retirement. Your credit score still matters in retirement, and these tips can give it a boost.
  1. How can you pay your Walmart credit card?

    Holders of Walmart credit cards can make payments on their balances due by mail, online or at Walmart and Sam's Club stores. ... Read Full Answer >>
  2. How many free credit reports can you get per year?

    Individuals with valid Social Security numbers are permitted to receive up to three credit reports every 12 months rather ... Read Full Answer >>
  3. Is Apple Pay safe and free?

    Apple Pay is a mobile payment system created by Apple to reduce the number of times shoppers and buyers have to pay for goods ... Read Full Answer >>
  4. Can you use your Walmart credit card at Sam's Club?

    Consumers can use their Walmart credit cards to shop at Sam's Club. However, they cannot use their Walmart credit cards when ... Read Full Answer >>
  5. Is it possible to get a free credit report from Equifax?

    It is possible to get a free credit report from Equifax, as well as the other two major credit bureaus, Experian and TransUnion. ... Read Full Answer >>
  6. How can you cancel your Walmart credit card?

    Walmart offers two types of credit cards: the Walmart MasterCard and the Walmart credit card. How to Close Your Walmart Credit ... Read Full Answer >>
Trading Center