Score damage increases if unpaid debt goes to collections

Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.

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Dear Speaking of Credit,
I owe around $1,000 to the state Bureau of Motor Vehicles and have had my driver's license suspended. I also owe around $800 for emergency ambulance visits to the emergency room. All of these are 2 to 3 years old. I received a collection agency notice for the ambulance charges, but only a collection notice from BMV for BMV fines (not from collection agency). My question is which of these affected, or are still affecting, my credit? − JIT


Dear JIT,
How − or whether − a debt is reported to the credit bureaus can make a difference between a little credit score damage and a lot. To minimize the damage to your credit score from unpaid debts, it's important to understand what kinds of debts you have, their stages of delinquency, and whether you're about to take another hit from another negative item being reported to the credit bureaus.

Unpaid debt, not yet in collections
The first debt you mentioned is delinquent, but not yet in collections. You should be relieved to know that the Bureau of Motor Vehicles is not likely to report drivers’ fines directly to the credit bureaus. It is not customary for government agencies to report to credit bureaus. Unlike lenders, they are unconcerned with your creditworthiness. They have other means to force payment, as you have found.

This means your credit score should not be impacted by the $1,000 BMV debt for now. But you are not off the hook: Although government agencies do not commonly report to credit bureaus, they will at some point assign a debt to a collection agency that does report to the credit bureaus. If that happens, your score could quickly take a turn for the worse. The better your credit was to start with, the worse the damage will be. 

You still have time to act on this debt and avoid allowing it to seriously damage your score, which, if reported, it will do. Find a way to pay it before the BMV assigns it to a collection agency.

Unfortunately, your other debt no longer affords you that opportunity, as much of its damage − though not all, as you will see − has already been done.

Unpaid debt, in collections
In the same way that your BMV fines aren’t currently affecting your current score because they haven’t been reported to the credit bureaus, there was a time when your ambulance bill was also being held back from the credit bureaus before its collection agency assignment. Still, despite having arrived a bit late to the game − two to three years after incurring the debt − you can avoid further harm to your score by resolving that $800 debt and removing the possibility of the collection agency taking legal action against you.

When a collection agency obtains a court judgment to collect the debt, record of the judgment is added to your credit report, where, like a collection, it remains and affects your score for about seven years, whether paid or not.

Score impact
While credit score damage is likely, how bad it is can vary dramatically depending on the state of the credit report just before the change.  

Taking a look at a couple possible credit scoring scenarios that may have existed before the addition of the collection item, the influences of such a change can differ as follows:

  • Higher score = greater damage. A high score, such as in the upper 700s, can only be achieved in the absence of any recently late payments or high card balances. Therefore, in the eyes of the score, adding either of these to a previously “clean” credit report can cast new doubt on the consumer’s future ability to pay on time. While the addition of a newly opened account can take a few points off your score, and a higher card balance can drop it by more than a few points, a collection or any debt gone unpaid for more than a few months can reduce a high score by more than 100 points.
  • Lower score = lesser damage. A lower score, such as below 700, results from the presence of late payments and/or high card balances on the credit report. When the credit risk level is already high − and the score is low − before the appearance of a new collection, the new addition will not necessarily signal as much of a change in future risk as we saw in the above example. And since adding one more negative item to the credit report in this situation isn’t nearly as much of a departure from the prior credit history as when the previous score was higher, this already-lower score should not drop by more than about 50 points.

See related: 10 tips for dealing with debt collectors

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Updated: 11-22-2017