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 CreditCards.com. His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
Dear Speaking of Credit,
When is it advisable not to pay a years-old account that is just reaching collections if it is going to be reported to the credit bureau as a delinquent account anyway? This account is for time-share maintenance. – Doris
It can seem hopeless when you know a collection or other derogatory item will be added to your credit report and remain there for up to seven years. It can also seem hopeless when you know that most of the credit scores used by lenders will continue to allow that collection to keep your score down regardless of the course you follow, whether:
- You pay off the debt or reach a settlement with the collection agency, or
- You allow the debt to go unpaid, knowing you cannot be or are not likely to be sued for payment.
Looking on the brighter side, while we know next to nothing about your situation, we do know the debt is “years old.” This can be a good omen for your score, as older “bad” debt is better for your score than more recent derogatory items.
Knowing all this, let’s start by taking a good look at how the age of the debt impacts your score and ultimate legal responsibility. Then we’ll consider how the amount due can help determine the chance of further action by the collection agency, followed by the effect of these various outcomes on your credit score and some recommendations.
Age of the debt
Generally the older the debt, the less harm to your score. Yet despite your debt being old, the reporting of it as a collection account will be new, based on the date it was assigned to the collection agency. To ease the pain, you may want to think of this scoring downside as simply the price you’re about to pay for not incurring this derogatory information on your credit report sooner.
If the collection is being reported accurately by the agency, the “seven-year rule” for purging negative information should still apply, regardless of the delay in assigning the debt to a collection agency. This means the collection should be deleted from your credit report about 7.5 years from the date it first became delinquent – the same length of time as if it had been sent to collections much sooner.
As a tip, monitor your credit report closely when that time comes, as you may have to provide documentation to the credit bureau and collection agency for its removal, if not done automatically.
Statutes of limitations
When trying to decide whether to pay or not, knowing your state’s statute of limitations can help tell you whether the time-share maintenance company or collection agency can sue you for payment. Every state has its own set of statutes of limitations that put time limits on the length of time a creditor has to sue a debtor for payment.
When using the statute of limitations to prevent a lawsuit, some requirements are usually placed on the borrower, such as appearing for a court date even if the statute has expired. When taking this tactic, you’ll want to be thoroughly familiar with the various rules.
Another factor when deciding whether to pay or not to pay is how aggressively the collection agency is likely to pursue you for payment. As a rule, the bigger the amount due, the more of an incentive the agency has to devote valuable resources to collecting it. Therefore, while the agency may not be motivated to chase after you for a small balance, don’t expect them to simply let things slide when there’s a large sum of money at stake.
But if it’s just a small balance you owe, you may be able to stay under the radar until reaching the 7.5-year mark when the collection comes off your credit report and is no longer factored in your credit score.
Video: The basics of debt settlement
Effect on your credit score
Your score is going to sink because you weren’t able to resolve this debt before it was sent to collections. Whatever the reason, not paying or settling the debt sooner has now led to your credit report soon showing a “new” collection account and most likely a lower credit score. And as an older collection will hurt your score less, a newer one can be expected to hurt it more.
Additionally, until you either pay off or settle the debt, and if it’s still within the statute of limitations, you’ll want to avoid having a civil judgment added to your credit report. A judgment remains on your credit report and can impact your score negatively for seven years from the date filed – long after the collection has been removed. When a lawsuit is a real possibility, it’s clearly to your advantage to find a way to pay in full or reach a settlement.
Plan of attack
If you’re looking to avoid paying on this debt, first make sure it falls outside the statute of limitations. Otherwise, only ignore the debt if it’s a small amount and the statute of limitations is close to expiring. And if you can afford to do it, make it easy on yourself by paying in full or reaching a settlement that resolves the debt once and for all.
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