How partial debt payments affect your credit, your legal rights


Speaking of Credit
Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
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Question for the expert

Dear Speaking of Credit,
I read that under the Fair Credit Reporting Act, a collection account will remain on your credit reports for seven years and six months from the date you fell behind with the original creditor. I was a dumb college student and charged off my first credit card back in 2008, the same year I fell behind.

However, in 2012 I made a payment to the collection agency. Dumb decision, I know. But if I am reading this correctly, the date I fell behind with the original creditor was back in 2008. Does this mean the collection should no longer be on my credit report? If so, how can I report it? Any advice?  -- Julius

Answer for the expert

Dear Julius,
The situation you've shared brings up two important credit issues for consumers with old negative items on their credit reports: The length of time an unpaid debt can continue to remain on your credit report and how long the statutes of limitations for lawsuits over unpaid debts can remain in effect -- particularly when a partial payment was made long after the original debt was charged-off. And though not specifically addressing a question of yours, another issue that might arise with the removal of this derogatory credit reporting information is that the credit scoring change you see may not be as favorable as what you're expecting.

Credit report
Your interpretation of the Fair Credit Reporting Act rules regarding the length of time a collection is allowed to remain on your credit reports -- 7.5 years from the date of the first missed payment -- is correct. It remains 7.5 years regardless of any subsequent payments made or contact with the collection agency, since the credit card debt was charged off and assigned to a collection agency.

If, by your calculations, these marks should have been removed by now and yet are still reporting, you'll want to follow the instructions for disputing inaccuracies in credit reports and provide any supporting documentation you may have that shows the actual date the debt first fell behind. You'll also want to send copy of the credit bureau disputes and documentation to the collection agency or credit card company via certified mail (return receipt requested), asking that they instruct the credit bureau to remove the outdated data and refrain from any further erroneous reporting.

Statutes of limitations
Unfortunately, the statutes of limitations for suing to collect an unpaid debt are not as clear-cut as the guidelines for removal of negatives from your credit report. Each state sets its own statute of limitations. They typically range from three to 10 years, after which the collection agency can continue with its collection efforts, but can no longer legally file suit against you for repayment.

Where I believe your "dumb decision" comment comes in -- and, by the way, it's not necessarily dumb to pay back what you owe -- is that you are probably expressing an awareness that in some states when you either make a partial payment or even simply make contact with a collection agency via phone or email, the statute of limitations clock is reset to extend beyond the initial time frame within which they can sue. Should this be your situation, and you have reaffirmed your debt, the statute of limitations for filing suit to collect your debt will have effectively begun again with that last payment in 2012.

If you are sued or threatened with a lawsuit by the collection agency before the statute's expiration, you may want to take the opportunity to resolve the debt once and for all by settling with the agency for less than the full amount due. If you do, make sure that any settlement agreement you sign doesn't include you waiving the statute of limitations, or you could again leave yourself open to a lawsuit over the remaining unpaid portion of the debt. Also know that you'll likely owe taxes on the amount of forgiven debt.

Credit score
While you didn't ask about this, I can't help but add that with the removal of these negative items from your credit report, and assuming the rest of your credit reflects a positive payment history and low credit card balances, your score should show some improvement, though perhaps not as much as you might expect. I bring this up because people tend to assume that the removal of any bad credit automatically results in a much higher score, and are disappointed and confused when, after going through all the work to clean up their credit, the score barely seems to budge.

Often, despite the presence of seriously adverse information on a credit report, if that information is so old it's ready to fall off, it may no longer be holding the score down nearly as much as it once did. And when that lack of negative impact is balanced against the positive impact of many recent years of on-time payments and a low credit utilization percentage, your score may already fall within the highest ranges a score can attain for a credit report containing a collection and a charged-off credit card. In other words, according to the scoring formula, your current overall risk level may not be much lower without the derogatory credit as with it.

If this happens, just keep in mind that even if your score has not jumped as high as you might have expected, having a cleaner credit file will enable your score to eventually climb much higher than it otherwise could. And regardless of your score, simply being rid of that collection and charge-off will be a rewarding feeling.

See related: How long negative information stays on a credit report, Even for old debt, settling beats other options

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Published: December 3, 2015

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Updated: 10-23-2016

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