This post originally appeared March 29, 2018 on CreditCards.com as “Unpaid cable termination fees can seriously hurt your credit“
By Barry Paperno
Dear Speaking of Credit,
I have a cable company charging me a $200 early termination fee. The only reason I’m terminating them is that the price of my bill keeps hiking up and up. If I don’t pay that fee, can they turn it into collections and hurt my credit? – Taylor
Fortunately for many consumers, collections for such odd debts as parking tickets, court fees and library fines can no longer appear on credit reports.
For this we can thank the portion of the National Consumer Assistance Plan adopted by the credit bureaus in 2017, prohibiting collections on credit reports that don’t arise from a contract or agreement to pay.
Unfortunately for you, however, that early termination fee remains something you agreed to, though undoubtedly embedded deep within the microscopic font of the cable TV service contract.
Now that you are apparently terminating that service earlier than the contract called for, the cable company can indeed come after you for that early termination and other related fees.
Unpaid cable bills sent to collection can seriously damage your credit
So, the answer to your question is, yes:
- The cable company is certainly within their right to assign that unpaid $200 early termination fee to a collection agency.
- That agency can then report the debt to the credit bureaus, where it can take up residence on your credit reports for the next seven years.
- There it can wreak havoc with your credit score, lowering it by more than 100 points in some cases, while potentially hindering your ability to obtain new credit for years to come.
Can you truly lose 100 points over a $200 unpaid cable bill? From a score well above 700, absolutely! Or it can continue to suppress an already low score that might have otherwise recovered more quickly.
In other words, a collection is not to be messed with!
Little-known facts about collections and credit scores
Here’s something many, if not most, consumers don’t realize about collections and credit scores:
- Amount doesn’t matter: Unlike credit card debt, where the amount you owe can affect almost a third of your score, the amount due on a collection debt over $50 simply doesn’t matter when the most widely used FICO credit scoring model – FICO 8 – is used to evaluate your creditworthiness.
- In other words, while any high credit card balances – in good or poor standing – can harm your score more than smaller amounts, a $200 collection debt (even if for an unpaid credit card bill) is likely to have the same effect on your score as a $2,000, or even $20,000, collection debt when all other factors, such as the age of the collection, remain equal.
- The much older, pre-FICO-8 scores that continue to be relied on by the mortgage industry offer no such immunity for collections less than $50.
- As a result, even a sub-$50 collection can jeopardize a mortgage application.
And if such indifference to the collection amount weren’t bad enough news for consumers with small or relatively small collections, the scores generated from FICO 8 and older models pay no attention whatsoever to whether the collection debt has been paid or left unpaid.
Once paid, a collection account affects these scores no differently than if it had remained unpaid.
Paying a collection does help in some ways
This is not to say you should simply disregard a collection on your credit report until it falls off after seven years. There are distinct benefits to paying collection debt, since doing so:
- Puts a stop to collection phone calls and letters from the collection agency.
- Prevents a lawsuit to collect the debt that can lead to wage garnishment or a lien on your property.
- Satisfies a mortgage lender’s requirement that, regardless of the score, any collection on your credit report must be paid in full.
How FICO 9 will reduce collection’s negative effect on scores
Along with some other consumer-friendly changes brought on by the National Consumer Assistance Plan, such as the removal of most tax liens and civil judgments from credit reports, some relief also awaits collection-burdened consumers with the latest FICO scoring formula: FICO 9.
Once the card companies, auto lenders, and other creditors eventually embrace FICO 9 – a process known to take many years, sad to say – consumers will start to see:
- All paid collections ignored entirely by the score.
- No medical collections less than six months old being added to their credit reports.
- Unpaid medical collections causing less score damage than other unpaid collection debt.
Best approach? Pay early termination fee
By now the message should be loud and clear: Don’t let any collection account for any amount find its way to your credit report.
Like it or not, make it a high priority to pay that early termination fee and any related charges without delay.
Not only can you then find a money-saving alternative to cable TV, but you can do so with the peace of mind that comes from knowing your saved your credit score in the process.