An unpaid utility bill could "dark out" your home and ruin your credit for nearly a decade. How widespread is this kind of issue? Take a look at this example. In 2008, almost 20 percent of Minnesota-based Xcel Energy customers had past due utility bills, according to USA Today. Xcel disconnected about 600 customers a day and many of these bills went to a collections agency.
Identification
A utility collections bill affects a person's credit score and is considered a significant event on a credit score, according to the Fair Isaac Corporation. The reduction in your score will depend on where your score was before the bill went to collections. The higher your score before the incident, the more it drops after it goes to collections. The report could lower your score by 100 points or more.
Time Frame
A utility collections bill stays on your credit report for seven years after it is reported delinquent or sent to collections agency, not the last date of activity. Since most utility providers try to collect a bill for 180 days, it effectively stays on a report for 7.5 years. Fortunately, the FICO formula weighs a collections account less as time goes on. The collections account is at its most damaging during the first two years after it appears on a report.
Solution
Paying off a collections account used to damage a score, because it renewed the last activity on the account to a more current date, giving it more weight. In 2010, it does not hurt to pay off a collections account, but doing so won't remove it from a credit report. Settling a utilities collection, however, is something lenders like to see and may require it for a loan application.
Tip
You can ask the utility company to remove the collections account with the credit rating bureaus in return for payment in full of the unpaid bill. If the utility accepts this proposal, demand the agreement in writing before you send in payment. Once you pay off the collections account, you have no leverage over the utility company.
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