A Common Credit Report Surprise That Will Cost You

man in suit showing a signboard with the different ranges of the credit score: excellent, good, fair and poor
Juan Moyano/Alamy
By Kelli B. Grant | @kelligrant

Even if you're vigilant about paying bills, a delinquent debt could be dragging down your credit score.

More than a third of consumers -- 35.1 percent, to be exact -- have a debt in collections on their credit file, according to a new report from Urban Institute. The report assessed 2013 data from credit bureau TransUnion.

"It's a surprising finding that debt in collections is that pervasive," said senior fellow Caroline Ratcliffe, an author of the report. "It threads through all communities, and it's particularly high in the South."

Concentrations of delinquent debts tend to be higher in areas that were hit hard in the financial crisis, Ratcliffe said. The average amount in collections is $5,178, and the median, $1,350. (See our slideshow for the states with the highest percentage of residents with a debt in collections.)

But for some people, the fact that a debt collector is hunting for them is a surprise. About 10 percent of consumers in the dataset had a collection out for amounts of less than $125. These were things such as unpaid parking tickets, delinquent gym membership fees and utility bills, among other more trivial debts. Some owed less than $25.

"Even if you think you're very responsible with your bills, it's not hard at all to end up with a collection on your report," said Gerri Detweiler, director of consumer education for Credit.com.

Medical debts are a common surprise collection, with billing system problems like a bill not being submitted to the right insurance or a bill that's in dispute by you, the provider or the insurer, she said.

There are also so-called last bills. "That's when you move, and there's a last utility or phone bill, but you don't get it because it doesn't come to your new address," said Detweiler.

Expected or not, a debt in collections can make a dent in your credit score. Depending on other aspects of your score, such a black mark could knock off 50 points or more, Detweiler said. Consumers with better scores otherwise, or a more recent collection account, would see bigger damage.

Spotting a delinquent debt is easy. Federal law entitles consumers to one free credit report listing open and recent accounts, from each of the three big credit reporting bureaus every 12 months. Access them at AnnualCreditReport.com.

Handling a debt in collections can be a little tougher. If it's an outright mistake to the tune of, "I paid that bill ages ago!" you'll need to dispute the error with the credit bureau. Paying the debt doesn't necessarily remove a collection from your report, and such black marks can stay on your report for seven years, said Ratcliffe. Some credit score calculations don't weigh a paid collection account any differently than one that's outstanding, either.

"The time to negotiate is before you've paid it," Detweiler said. Ask if the collection agency will arrange to remove the debt once paid -- many will, particularly if it's an unexpected debt you weren't aware of.

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Banks love So-So credit - I tend to believe bank have a major stake in credit companys, Look at all 3 credit reports, the FICO scores are all different, See which one the Company or loan company use. It is not by accdent. The lower your score the more interest they can charge and make more money. Donot fool yourself it is all about money not you. I have three scores 760 - 730 - 719 everybody goes for the 719. Avg. 736 Everybody does the math Different.. I stopped chasing numbers awhile ago, and just started "fighting" with lenders. Do not be afraid to say NO to a lender, Check them all out, A fast deal is a bad deal. He needs you more than you need him.

July 30 2014 at 8:55 AM Report abuse rate up rate down Reply
Charlie Jackson

Credit Score is a dirty gimmick and consumers are not with you wall street

July 29 2014 at 8:34 PM Report abuse rate up rate down Reply

Oh yah, I'm playing there game, but just like every or almost every business in California, no one really want's to work at there job, or if they are employed they don't have a clue how to do properly what there employer believes he's paying for, or maybe he's a numb nuts and the real problem? Why even mention the power these credit reporting thugs use on people trying to correct there credit. I believe they get a real kick out of screwing peoples lives up, why else would would they themselves make it soooo hard to make things right?

July 29 2014 at 8:26 PM Report abuse +2 rate up rate down Reply
2 replies to johnny's comment

I went through a period in 2006, and become unemployed due to health reasons. My credit went in to the tank. Today, I pay off ALL my charge cards every month. It has helped in rebuilding my credit, but I seem to get hit when I use more of my credit then the prior month. (I keep my spending at less then 20% of my total credit availability). I also get hit because I WILL NOT get more credit then I WANT!

July 30 2014 at 2:23 AM Report abuse rate up rate down Reply

Home: have your electric utility do an energy audit on your home.
Most result in a 10 or 20 percent reduction in your electric bill.
Also, examine your trash and see where you can optimize your household processes.
Both efforts should save you between 50 to 100 bucks a month.
Use these savings to pay off your credit cards and other bills.
Resist using the extra funds on things you don't need.

A bad notation on your crdit report could cost you $100,000 in cash and benefits over a lifetime.

July 30 2014 at 5:38 AM Report abuse rate up rate down Reply