Past Due Bills Can Get You In Trouble

January 17th, 2012

past due

Past due bills, look out! One thing that gets a lot of people in trouble with their credit scores is a past due account. This is also known in the industry as a collection or a collection account. These collection accounts stay on your credit report for 7 years.

How does this affect me?

That is bad enough as it is, but it gets worse. Let’s assume you have an outstanding five year old collection for $250 on a credit card. These past due accounts are usually sold off many times to different collection agencies that buy the debt for a fraction of what is actually owed and then they try to collect. This is one of the largest profit margin businesses going currently. Imagine buying a five year old $250 outstanding debt for $15. Then assume you collect $30 of it. The collection agency has a 100% profit margin on that collection!

Credit score

Credit scoring algorithms mainly focus on the last two years of credit history in general. So in our example, this collection account is still a negative and will hurt your credit score, though it is not as important since its five years old. The last couple of collection agencies that own the debt are usually smaller, less than reputable companies. They usually use scare tactics to get you to pay. They’re well aware that the debt will soon fall off of your credit report. So they get more aggressive as the collection account gets older.

What to do

Certainly a person can do the right thing and make payment to the collection company if they really owe the money, but there is a catch. These items stay on your credit report for seven years based upon “date of last activity”. So when you make even a small payment, it is going to start the clock over on the seven year waiting period. This means that if you make a payment years later, suddenly this old collection is going to look like a brand new collection again and stay on for seven more years. And, most importantly, your credit score will fall quite a bit because the credit scoring algorithms will treat this as a recent collection account.

I am not condoning the dismissal of outstanding bills. What I am suggesting is to work out issues like this ASAP. Don’t just throw your hands up when talking to creditors and tell them, “I don’t care what you do, I am not paying the amount you think I owe.” You have to come to a solution, and you have to do it quickly. Or you will pay for it later.

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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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