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Obtaining a loan may be influenced by small unpaid debts

As many Ohio residents who are in the process of securing a loan know, an individual's credit score has a great deal to do with it. What they may not know is that even small, unpaid debts affect the score.

The FICO score is a major element of an individual's credit report and measures risk. The decision to extend a loan is calculated largely by whether the loan will be repaid based on the debtor's history of paying bills. Late payments or uncollected debt are an important part of the payment history, and small debts are processed the same as big ones. While the newest FICO version does not include debts under $100, it is not currently used by all lenders.

Small debts may make a big impact on whether an individual will get a loan and what amount of interest will be attached to it. The greater the risk, the higher the interest. The longer a debt remains on a credit report, the less impact it may have. Some small debts are placed on a credit report without the consumer's knowledge. Checking credit scores regularly may help. If possible, it is recommended that the debt be paid in full, particularly if it has been placed within the past year.

Even if a debtor pays off a small loan as soon as they know it has been posted to their credit record, their score may still be damaged. The increased interest rate on subsequent loans may cause the debtor to find it difficult to keep up with payments, particularly if they are laid-off or another source of income is disrupted such as the elimination of spousal income. When this happens, it may be advisable to consult with a bankruptcy attorney regarding possible debt relief. The attorney can discuss available options including bankruptcy, depending upon the client's particular situation.

Source: FOX business, "Small Debts Can Lead to Big Credit Score Problems", Erica Sandberg, July 17, 2014

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