How Unpaid Bills Affect Your Credit Score?

24 November, 2014

The credit score is an important value that shows someone’s creditworthiness. It is a term that is normally used in the financial lending industry to describe a person’s ability to pay back a debt. The score is calculated on the basis of the financial records and other credit related matters such as bad debts. Banks use the value to assess the creditworthiness of a particular borrower. In most cases, the value is brought to light if a person wishes to borrow funds. A person with a poor credit score is one whose ability to pay back debts is questionable. On the other hand, a person with a good credit score is whose ability to pay back debts is sound. Suppose you have a lot of unpaid bills, how can they affect your credit score?

The nature of the bill

When evaluating your credit score, financial lenders will take into account your ability to pay back bills. However, not all debts may be taken into account. In most cases, the nature of the debt is what matters most. After all, not all bills may be reported to financial institutions even if the collection agencies may note them down. Under normal circumstances, the impact of a bill or debt on company policy may deem a particular bill as worth reporting or not. For example, huge medical bills may be reported if they are likely to have a positive impact on company policy. This is because collection agencies earn more from reporting huge bills compared to small ones. Therefore, small bills such as water and electricity bills may not be reported at all and neither will they have an impact on your score.

The nature of your behaviour

This might appear stunning to most people who think the credit score is only affected by money and never affected by factors such as behaviour. For example, suppose you forget to pay a small bill and you do nothing about it even after realising that you had forgotten to pay a bill. Your creditors will report the bill to the collection agencies even the bill may appear to be too small in your eyes. The situation is even exacerbated if you repeat the same mistake.

Negotiate with your creditors

It is often advisable to take your time to negotiate with your creditors over any unpaid bills. It is unfortunate to learn that even unsettled medical bills affect credit scores in a negative way. Instead of waiting until they have reported your unpaid bill or unsettled loan, you should take your time to work out a repayment plan that you can manage. If most of your unpaid bills and unsettled credits can be dealt with in this manner, you can keep credit score as low as possible.

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