Debts that make it to the collection stage can lower your credit score significantly, especially if you have a good to excellent credit score. However, collections under $100 do not factor into your credit score most of the time. In 2009, Fair Isaac Corporation, the maker of the software that major credit bureaus use to create credit scores, removed collections accounts less than $100 from the credit scoring calculations in most cases. This is a victory for consumers since unpaid library fines and small medical co-pays that slipped through the cracks should no longer impact your credit score.
Generating Credit Scores
While all three credit bureaus – Experian, Equifax and TransUnion – use information on your credit reports and the FICO scoring software to generate a credit score, the scores can still vary, partly because of the data each bureau chooses to input into the FICO software and the fact that not all creditors and collections agencies report to every bureau. That's why it's important to monitor all three of your credit reports. What is clear, is that the latest FICO scoring models do not include collections accounts for amounts less than $100 where the account is reported by a collection agency. If the collection is reported by the lender's own in-house collection team, such as a department store or a medical group, the $100 exclusion doesn't apply and the debt may find its way into your credit score.
Reporting Time Frames
Collection accounts reported to the bureaus can only stay on your credit report for seven years from the first day of your default. This applies if the debt remains unpaid. If you pay it off, it goes away two years from the payment date. But make sure the collection is actually on your report before you pay it off. Otherwise, the account can show up if and when you make the payment. This can actually have a negative impact on your score.
A recent report by the Consumer Financial Protection Bureau suggests that around 43 million people, or 20 percent of U.S. consumers, have unpaid medical debts that have gone into collection. This means that an estimated one out of every five credit reports has a medical collection on it. This can knock a significant number off points off someone's credit score, even if the debtor has no other collections. More than 33 percent of medical debts sent to collectors were under $100 before the FICO scoring change.
Avoiding and Removing Collections
If you're disputing a medical bill, let your medical provider know. It might agree to hold the bill until you work out the situation with your insurer. If a medical or any other bill goes to collections and is reported, you can try and make the payment of the account contingent on the removal of the collection record. And finally, if you have bills on the verge of being sent to collections, which usually happens 90 to 120 days without a payment, you can pay the bill, then seek reimbursement when the dispute gets settled.