I read an article yesterday from the Wall Street Journal Online edition talking about how cities and counties are increasingly using collection agencies to settle up on old fines, traffic tickets and other civic malfeasance. Interesting article. The piece went still further to talk about how people's credit was being ruined for nothing more than fines for overdue books.

The new trend, according to the article, was that instead of local governments and public institutions trying to collect on such small debts they would instead turn them over to collection companies, who are experts in such practices.

Apparently some of these fines can be 10 or more years old. Overdue library book charges for $40 or so that were as much as 12 years overdue were being turned over to the professionals for collection. When a company, or government office for that matter, turns an item over for collection, the collection agency will typically split what's owed. If the library has an outstanding fine of $30 that's a decade old, they can turn it over to a collection agency who will give them $15 when or if they collect.

What do collection agencies do? They collect money. But because these amounts are typically so small, such as a parking ticket or a library book, a collection agency won't invest a whole lot of capital in trying to collect the item. So instead they simply put it on the offenders credit report and wait until the consumer pulls the report on his or her own then, wham! … collection account, baby.

But my interest in the story was not necessarily about the treatment of public library scofflaws. No, my interest was the comments of some of the people in the article. One fellow claimed that he had perfect credit up until his late-book fee appeared in his credit report, but now it was damaged.

Another expert confirmed to the effect that a collection account can damage a report as much as a bankruptcy. That's when I stopped. Whoa. Really? A collection account can harm a credit report as much as a bankruptcy? And an overdue book fine can ruin a credit score? My instincts told me differently.

I've closed a lot of loans. Lots of them. And I've seen the effects of collection accounts on credit scores. But I've not seen what was described in the article. If a person has otherwise perfect credit with a pristine credit score floating around in the 800s then an isolated collection account won't kill a score. Other loan officers can back me up on this. An isolated instance of negative credit such as a collection account or a late payment won't ruin a score. If that's all there is on the report.

If however, the borrower has other factors such as little or no available credit left, spotty credit or recent late pays then yes, a new collection account will negatively harm a score. In a big way. But typically an isolated negative item won't be enough to "push someone into higher interest rates on their loans." Sorry, but I most humbly disagree. The problem is that such a statement was coming from someone who should really know better but doesn't.

I also know that a collection account isn't just as bad as a bankruptcy. An outstanding collection account won't push up a consumers interest rates when they go to borrow, as claimed by one of the "experts" in the column. Not by itself anyway.

But a bankruptcy? You better believe it, especially if the bankruptcy was recent, say in the past couple of years or so. A recent bankruptcy, by itself, will ruin credit. A collection account, by itself, will not. Sorry, I've just dealt with these situations in the real world. If you find you have an unpaid traffic ticket from 1995 that's been sent to a collection agency, I would probably go ahead and pay it but I wouldn't worry too much about your score if that's all there is. You'll be fine.

My issue is less whether the article was factually correct, but more that people who read the article come away with bad information -- from some very reliable sources.

Published: January 13, 2006

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.