Should you bother paying off really old debts?
A debt is a debt, but its impact on a credit score fades over time
Dear Opening Credits,
Two years ago, I found out that my wife had two old credit cards in collections for about $2,000 total. They were both at least 10 years old, so it didn't affect us getting our house because her credit score was still high enough (high 600s). My questions to you:
- If we pay one of these debts off now, will it affect her credit either way?
- If we don't pay off these debts, are there any repercussions? (Can they put a lien against the house or take my stuff?)
I mean, we don't owe the money anymore, right? -- Phillip
Your letter has an interesting "if a tree falls in a forest and no one is around to hear it, does it make a sound?" quality. Rephrasing that classic existential puzzle a bit -- if a credit report can no longer indicate a debt's existence, and a creditor can't sue you for repayment, is the liability gone?
Nah. It doesn't take a Ph.D. in philosophy to conclude that a balance owed is a balance owed until it's paid or formally forgiven. The debt fairy doesn't magically pay off accounts after a certain time frame has run.
So let's begin with question No. 1: How does an elderly obligation affect a credit report and score? The Fair Credit Reporting Act stipulates that consumer credit reporting agencies are prohibited from listing such negative information as charged-off accounts once seven years have passed following the date of delinquency. Because the two credit accounts you mentioned went into collections 10 years ago, they should have been purged from your record about three years back. The impact, therefore, is zilch.
That's the legal side of credit reporting, but what about your wife's credit score? I contacted FICO -- formerly known as Fair Isaac Corp., the company that developed the FICO score -- on your behalf. Here is what Ethan Dornhelm, their senior scientist, had to say:
"Based on the scenario described, it is unlikely that paying off the collection accounts now would have any material impact in either direction on the FICO score. The primary way that collection information is factored into the FICO score is based on the presence of collection accounts and how recently they were posted to the credit file. So, all else held equal, as a collection account ages over time, that collection will gradually have less and less of a negative impact on the FICO score. The fact that the collections in question are from a while back could be one explanation for why your wife was able to achieve a solid FICO score despite having two collections on her file."
Make sense? The score bounced back because so much time went by. In fact, the way you managed credit in the recent past matters much more to lenders than what you did a decade before. That's why you were able to obtain what sounds like a decent mortgage.
Now for question No. 2: Are there any legal consequences you could suffer now for not paying the money owed? The answer to that lies in whether or not the statute of limitations for being sued for a debt has lapsed. The length of time varies by state -- and you can find this information for every state in a special interactive tool here at CreditCards.com -- but if it's gone beyond the stated time limit, you're in the clear. If it still applies, though, the creditor can drag you into court.
Let's assume the statute of limitations is still in effect, and the creditors decide to sue you. If they win -- and they usually do win -- this is what can happen:
- The sum for which you'll be responsible (the judgment) will likely be much higher than the original balance, as court costs and interest will be added.
- The judge may allow the creditor to levy (take and sell) or place a lien (issue a legal claim as collateral) against nonexempt assets and/or garnish a percentage of your wages.
- A record of the judgment will appear on the public record section of your credit report for up to 10 years.
Clearly, the repercussions for being sued for a debt are pretty severe. For this reason, waiting to contact a creditor until after the statute of limitations has run its course may be wise.
Ultimately, Phillip, you and your wife have a choice. You can dredge up the past and make good on the old accounts, or you can simply let them fade into obscurity. As with the proverbial tree, no one will know they've fallen.
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Published: May 13, 2009
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