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Can old debt threaten a great credit score?

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Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question for the CreditCards.com expert Dear Opening Credits,
Do I need to be concerned about my credit score being affected in the future if I ignore attempts to collect from an agency after the statute of limitation for my state has expired? Currently I am in the mid-700 range because I have "bitten the bullet" and paid a higher interest rate on my auto purchase that I later refinanced at a much lower rate. Thank you for taking the time to look into my question.  -- Thom 

Answer for the CreditCards.com expert Dear Thom,
Your credit score is excellent, so I can understand not wanting to do anything that will hurt it. Here's what you need to know so you can handle that collector while also preserving your high score.

First, get clear. When an account is past the statute of limitations, it means that the creditor can no longer sue you for an outstanding balance. It has absolutely nothing to do with a credit score. The only information that does impact your credit score are the items that are appearing on your credit reports right now.

Even if the collection agency can't file a lawsuit against you, the debt may still linger on your reports for quite some time. As per the Fair Credit Reporting Act, an unsecured debt can be listed on a credit file for seven years from the date of last activity. That might mean when you last made a payment or when it was charged off by the original creditor and sold to a third party collection agency. In general, the clock starts ticking about 180 days after your first delinquency.

The number of years a creditor has to sue you for a debt depends on state, not federal, law. In some states, such as Kansas and Alabama, a creditor has only three years to file a lawsuit. In others, the statute of limitations can exceed the amount of time a debt may even appear on a report. Take, for example, Wyoming. Live there and you could be sued for a balance 10 years from when the balance first went delinquent!

So what are the credit scoring repercussions for ignoring this particular debt? Not much. While all the borrowing and repaying activity that's listed on a credit report is factored into a credit score, older information carries less weight than newer information. As the account ages, its importance will continue to decrease.

When the account finally drops off your reports for good, it will not be included in your scoring calculation at all -- and your score should shoot up even further. Because it's in the mid-700s now, the collection account must not be harming it too much. Handle all other accounts (such as that car loan) well, and it will have even less relevance.

Now for some warnings: It sounds as if the collector is contacting you and requesting a payment. Approach this matter very carefully. You can choose to pay (if you feel is the right thing to do), but you're under no legal obligation to do so. Just know that if you promise to deal with it -- either over the phone or by mail, you can restart the statute limitations clock. That's called re-aging an account.

You may also cease all communications. The FCRA stipulates that you can tell the collector to stop calling and writing. Do that and the collector has only two options -- honor your request or sue you. However, if they can no longer take legal action against you, that's it. The worst thing they can do to you is send information about the debt to the credit reporting agencies until the seven-year time frame has expired.

See related: Debt in collections: Do you settle or pay in full?

Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.

Send your question to Erica.

Published: May 29, 2013


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