Impact of Carrying a Small Balance With Your Credit Score
Are you dealing with a small balance collections account and wondering if it will effect your credit score? Today the collections industry is booming. Literally, in Buffalo, NY collection agency’s are one of the number one employers regionally, only medical services and government services beat that out. In their effort to maximize profit margins collection agencies now buy debt from anyone willing to sell it, which can include debts as low as a few dollars. Anything from credit cards to old library fines to movie rental late fees can end up in debt collections as a charge off. I have seen clients with collection accounts for as low as $1.27 believe it or not.
Basically any goods or services you use but do not pay for fully can incur a collections account no matter how small the debt is. The next question is will it effect my credit. The answer is that it depends. If the collection agency decides for whatever reason to report the past due account to the credit bureaus then yes your credit score will likely suffer. Yet it also gets more complicated than that as I will explain further on. The amount of debt owed does not impact your credit score, rather just the fact you did not pay for something as agreed upon with the creditor, your score will dip regardless if the debt was $1,000,000 dollars or just $1.00 for a late movie rental charge that was never paid.
There is two exceptions to the above rule of course. There is always exceptions to everything in life am I right? The first exception is for the VantageScore 3.0 credit score model. While many creditors do not use this model some do. The VantageScore 3.0 credit score model does not factor in any past due accounts that have been settled or paid in full, so if you pay the small past due account it will not effect your credit score with any lender using the VantageScore 3.0 credit scoring model. Of course other credit scoring models it will impact your credit score. You can’t win them all of the time, only some of the time.
The second exception to the above rule is for lenders who opt to use the FICO8 credit scoring model. While this model was released in early 2009 many lenders do not use it, but many more lenders today are using the FICO8 model. Under the FICO8 model collection accounts with amounts under $100 are excluded from affecting your credit score, so a small debt of say $10 will not drop your score under this model. It is important to note that unless the past due account is 6 plus years old you should pay it off. If the account is 6 or close to 7 years old at the 7 year mark it automatically falls off your credit report, so you could simply opt to not pay it and let it fall off your credit report in the coming year.
If you do find that you have a debt appearing on your credit report or after being contacted by a collection agency, you should pay the debt off after verifying that the debt is valid. The reason I state you should verify the debt is I have worked as a debt collector and know from first hand experience that many mistakes are made on the collections end or on the creditors end and so called debts actually do not exist, such as debts that were paid on time but an error caused it to be reported as not paid.