Ignoring old debt can come back to haunt you

Future lenders like the fact you paid delinquent debt off

By Todd Ossenfort

The Credit Guy

The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues. Ask a question 'The Credit Guy' archives

Dear Credit Guy,
I have just looked at my credit report, and I have several negative charge-offs on which I still owe a balance. They were from about five years ago when I was messed up. I was told to not pay it off because if I do, it will stay for another seven years in the credit report, and if I do not pay it off, it will be taken off in two years. I wanted to know what the best way is for me to proceed. The negatives have messed up my credit and put me in the poor category. I really want to improve my credit. I already have a few credit cards that I am paying on time. (The purpose of those cards is to improve my score, so I can eventually buy a house in few years.) What is the best thing for me to do? Thank you. -- Amber

Dear Amber,
The well-meaning person who mistakenly informed you not to pay your charge-offs because payment would affect the date the accounts are removed from your credit report is confusing two things: paying a debt and the restarting of the clock on the statute of limitations for paying a debt.

When you make a payment on an old debt, the statute of limitations -- the time period allowed by a state to collect a debt -- is restarted because, for most statutes, the time to collect begins from the date of last payment on the debt.

The reporting of debt on your credit report is regulated by the Fair Credit Reporting Act, and the last date of payment does not influence when negative information drops from your report. The details of reporting a negative item on a credit report are listed below:

"(c) Running of Reporting Period
(1) In general. The 7-year period referred to in paragraphs (4) and (6) of subsection (a) shall begin, with respect to any delinquent account that is placed for collection (internally or by referral to a third party whichever is earlier), charged to profit and loss, or subjected to any similar action, upon the expiration of the 180-day period beginning on the date of the commencement of the delinquency which immediately preceded the collection activity, charge to profit and loss, or similar action."

While the wording of the act is dense, I quote it to show that it does not say that the time period for reporting a negative item on your credit report is tied to payment activity.

Now that we have that cleared up, if you go ahead and pay what is due on your charge-offs, it will not increase your credit score a great deal, but those reviewing your credit report will see that you did eventually make good on your agreement to pay. Lenders view making full payment, even if it is late, in a much better light than not paying what is owed. Remember, you can run, but you can't hide. I am glad to see that you admit to "messing up," but now it is time to take responsibility and correct your mistakes from the past so they quit haunting you.

By the time you are hoping to buy a home, the charged-off accounts may have already moved off your credit report. In the meantime, paying the accounts will improve your chances of qualifying for any credit you may want or need now.

Take care of your credit!

See related: State statutes of limitation for credit card debt

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to The Credit Guy.

Published: December 22, 2008

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