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Pros and cons of paying off old debt

Yes, it looks good to lenders, but you don't want to reactivate time-barred debt

By Todd Ossenfort

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

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Question for the CreditCards.com expert

Dear Credit Guy,
If I pay an account off that has been delinquent since 2005, will the delinquent account stay on my credit for seven years from the date of my payment? -- Jessica

Answer for the CreditCards.com expert

Dear Jessica,
Great question, and it is one that I get asked a lot. Your delinquent account will remain on your credit report for seven years from the first date of delinquency (typically 180 days past due). So for an account that was delinquent in June of 2005, the account will remain on your credit report until June 2012. For credit reporting purposes, negative accounts remain on the report for seven years whether or not payment is made.

For example, your original account was most likely charged off in 2005 and is listed as a charge-off on your credit report. That account will remain listed on your report until 2012 if you pay what is owed on the account in full, in part or not at all. Because the account is delinquent and charged off, your credit score has already dropped as a result. Paying what is owed on the account will not raise your credit score. However, you will accomplish two positive things if you pay what you owe in full:

1. You will avoid collection activity on the account, which can be a long, difficult process.

2. You will be more attractive to lenders should you need to borrow money. Lenders are much more likely to overlook past credit transgressions if you eventually paid what you owe in full. In addition, you will have the added bonus of knowing you did the right thing.

Now that we have that cleared up, let me explain when a payment on an account does have an effect on the time clock. Each state has a statute of limitation (SOL) on collecting a debt using the courts. The number of years for an SOL on collecting an unsecured debt vary by state from as little as three years in some to as long as 10 years in others. The clock starts running on an account once it becomes delinquent. Any payment on the account will restart the clock.

As an example, if an account went delinquent in 2005, but had a payment made on the account in 2007, the beginning date for the statute of limitations would start again from the payment date in 2007. However, the date for when the account would be removed from a credit report would not change.

So, if the statute of limitations in your state is five years or less, your account may no longer be collectible in court. But, keep in mind that does not mean that the collection process will end. Nor does it mean that a court will be unable to grant a default judgment if you do not appear to use the SOL as a defense against the attempted collection.

Bottom line, if you can afford to pay your delinquent account, I'd recommend doing so.

Take care of your credit!

See related: Lessons in paying off delinquent debt, Interactive: Life cycle of a delinquent credit card debt, Statutes of limitation for credit card debt, Decade-old credit mistakes should appear on your report, Avoid restarting the clock on time-barred 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: July 26, 2010


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