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Small Debts can have a Huge Impact on Credit Ratings

By Sally Maison
Published: Monday, July 21st, 2014

It is hard to forget huge financial obligations; small ones can be forgotten, but only for a little while. If unpaid, small liabilities can have disastrous effects on the credit ratings.

According to Equifax, close to 200,000 credit files are of collection accounts of less than $ 100. Small debts are usually discovered at their worst, when one is shopping for a car or a mortgage. At such instances lenders charge higher interests.

A common reason why people fail to pay minor debts is that they are unaware about their existence. Some creditors do not make efforts to follow such a person. Mike Arman, a resident of Oakhill, Florida, once found himself in such a position. He once went to an emergency room having a problem with his eye. Afterwards he settled the bill and moved on. Two years later he found unknown debts on his credit report. After some digging he realized that the original statement was sent to a wrong address. “Instead of picking up the phone and talking to me or even checking my records for my right address, off it went to a local collection agency!” Arman says.
Some people ignore small debts in favor of what they feel are more important accounts, Gail Cunningham of the National Foundation for Credit Counseling notes.

“They think the consequences of nonpayment of a small bill are not as severe as those of neglecting payment on a larger debt,” he adds. “This could be their logic if money is short and they have to stretch their dollars.”

Credit ratings such as FICO are based on the information in one’s credit report. Payment history is the most important factor in credit scores. If any bill was paid late, the rating must suffer.
“A small debt that’s reported to a collector or written off impacts a score dramatically,” said Schiffman. The rating can dive from 750 to 550 in seconds. A current version of FICO does not consider amounts that are less than $ 100, however lenders must not use the new version and many of them don’t.

One may not be aware of their existence unless one receives collection call letters. A survey conducted by TransUnion in 2013 found that more than 30 percent of the Americans have never seen their credit reports.

One should regularly check their report to spot the small debts and dispute any anomalies. A small debt should be paid as soon as it is noted to avoid further damage on one’s rating.

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