You moved, but didn’t realize you still owed $5.32 on your cable bill. You closed a credit card account, but your last payment arrived after the due date. The power company sent a bill for your vacation house to that second home instead of your primary address.
Those forgotten, late and misdirected bills, often bills for tiny amounts, can send your credit score plummeting.
“Something seemingly as small as having a low-dollar bill go into collections can have a very large-dollar impact,” says CFP professional Manisha Thakor, director of wealth strategies for women at financial adviser firms Buckingham and the BAM Alliance. The resulting lower credit score can cost you thousands of dollars in higher interest payments on a mortgage, car loan or other credit line.
You might think — or hope — that a small unpaid bill wouldn’t matter. Sadly, you’re probably wrong.
“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,” says Rod Griffin, vice president of public education at Experian. “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.”
FREE TOOL: Check your credit report today at myBankrate to discover unpaid balances.
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How much damage?
In some cases, a small slip-up may not hurt you. But don’t bet your credit score on it. Your payment history — whether you pay your bills on time — makes up 35% of your credit score.
Some lenders have switched to scoring models that ignore unpaid bills under $100. But many are sticking with older scoring models or have their own models that don’t necessarily consider the amount owed on the delinquent account.
“There are a lot of different scoring models out there — more than the average person realizes,” says Gary Poch, vice president of consumer services at the credit agency Equifax. “A lot of places might even have their own custom models they’re leveraging.”
If the delinquency is a credit card bill or other account that is regularly reported to the 3 major credit reporting agencies, then your credit score could take a hit as soon as the account is 30 days past due, Poch says.
For example, a 30-day delinquency could cause a credit score of 760 to fall by 60 to 80 points, according to a study by VantageScore, a competitor to the more common FICO score.
A larger unpaid bill can impact your credit score more than a smaller bill because it will affect another factor of your score — credit utilization — how much debt you owe compared with your available credit, Poch says. How much you owe accounts for 30% of your credit score.
But in terms of delinquent accounts, what matters is how long it takes you to pay the bill. “The longer it goes on, the more severely it’s viewed by the credit reporting agencies,” Poch says.
What you’re worth doesn’t matter
If you have a ding on your credit score, it won’t matter whether you have millions in the bank and are seeking to borrow money for an $800,000 home or are living paycheck to paycheck and want to borrow $4,000 to buy a used car.
“For many high-net-worth investors, credit scores are not something they think about,” Thakor says. “They often have strong incomes and nice portfolio balances.”
One of Thakor’s clients pays $7,000 to $8,000 a year more for her mortgage — all because of a forgotten bill of less than $75 for a mobile Wi-Fi unit. The client, who has more than a million dollars saved for retirement, closed her successful business and left on an extended trip in 2015, Thakor says. Her office manager was supposed to pay and close out all accounts, but the bill for the portable Wi-Fi slipped through the cracks.
When the client applied for a loan for a retirement home, she learned about the unpaid bill that had gone to collections, Thakor says. The ding to her credit score cost her about a quarter percentage point in interest because she didn’t qualify for the best rate.
“In today’s lending environment, being high-earning and/or wealthy isn’t always enough to get the best interest rate,” Thakor says. “You have to have a demonstrable track record of good credit behavior as well.”
Over the life of a 30-year loan, Thakor’s client will pay nearly a quarter of a million dollars more based on the higher interest rate.
Pay attention to your credit
Medical billing is another issue that can trip people up, Thakor says. “Many doctors’ offices are using outside billing services to handle the differences between what your insurance reimburses them for and what they expect from you,” Thakor says. “Often what I see happening is someone pays their co-pay at the doctor and thinks everything is fine. Then they get a bill in the mail from an unknown address in another state without the doctor’s name on it and mistake it for junk mail, possibly never opening it. This can go on for 2 to 3 months and then that remaining balance gets sent to collections.”
One way to quickly discover slip-ups and protect your credit score is to keep up with your credit history. Take advantage of the opportunity to check your credit score at each of the 3 credit reporting agencies for free once per year. Experts recommend checking 1 of the accounts every 4 months so you cover all 3 within a year.
FREE TOOL: Get your credit score for free, and with no obligation, at myBankrate today.
“I do hear from people who get their credit report for the first time in 3, 4 or 5 years and discover an account they’ve completely forgotten about that has late payments they didn’t know about,” Griffin says. “They have a credit card and tossed it in a drawer.”
To help avoid slip-ups, put your bills on auto-pilot. Automatic bill pay and automatic deposit of your paycheck will do more than save time and postage — it may save your credit score.
“Use technology that’s available to make it easier to manage your finances,” Griffin says.