What You Need to Know Before Paying Off Old Debt
Building a good credit history means fulfilling your obligations, but if you lose your account somewhere along the way, it could haunt you again. Paying off old debt can keep creditors at bay, but there are some pros and cons to think about before giving away cash.
This post was originally published on MyBankTracker .
Time limits on fees
Each state limits how long a creditor must attempt to collect an outstanding debt. The limitation period starts from the date of the last activity in the account and depends on how much debt you have. For things like credit cards or medical bills, it usually ranges from three to six years, although in some states this period can be extended to 15 years, depending on what type of debt it is and whether you signed a contract or promissory note. …
Once the time is up, the lender will no longer have any legal means to make you pay. This means you cannot be sued, you cannot face withholding of wages or bank account seizure. However, this does not mean that the obligation simply disappears. If the actual debt, you still have a remnant, and the only way to get rid of it – is to repay it in the statement of bankruptcy .
Old debts and your credit score
The largest chunk of your credit score is based on your payment history. Whenever you pay late or miss a payment altogether, it shows up as a negative mark on your credit report. The more late and missed payments you have, the more your account suffers. Once you get to the point where you haven’t paid for 90 days or more, the lender can simply write off the bill entirely. If this happens, your credit rating will suffer even more.
Negative marks can remain in your credit history for up to seven years, which can make it difficult to qualify for new loans or receive utilities on your behalf without making a large deposit. As debts get older, the impact of late payments or write-offs begins to diminish somewhat, although this does not necessarily improve your bottom line. Paying off old debt can tighten it up a bit if your lender agrees to report your account as Paid in Full or Paid as Consensus, but this is usually not as dramatic.
What happens if you don’t pay
There are some disadvantages to keep in mind if you choose not to pay off your old debt. Apart from damaging your credit, you are likely to be targeted by debt collectors, which can be annoying to say the least. Federal law regulates which contacts can be initiated by collection agencies, but at a minimum, you might have to put up with repeated phone calls or a flood of collecting letters.
Even if the debt goes beyond the statute of limitations, you shouldn’t assume that these pesky collectors will simply leave. Some collection agencies specialize in buying up old debts cheaply and then forcing consumers to pay back their cash. It is likely that in 10 or even 20 years you will receive a call from a collection agency, and if you are not careful, you will fall right into their trap.
One of the things that you should be especially careful about with old debts is not to renew the statute of limitations. Even admitting that you owe money over the phone is enough to reset the watch, giving collectors extra time to chase you. When dealing with a collector, it is best to say as little as possible, especially if the collection window is closing soon. Asking for written confirmation of your debt and keeping a paper trail of your posts is the best way to protect your rights.
When paying off old debt is the right move
There are several situations where paying off old debt can actually do you good. Whether you are considering buying a car, applying for a mortgage, or refinancing your home , your lender will take a close look at your credit history. Paying off old debts once and for all may not do any good, but it will show the bank that you are serious about your financial obligations.
Many employers take your credit into account when making the final hiring decision. While they cannot access your account, they can see your report, including any mistakes you made along the way. If you’re trying to get a job that requires security clearance or is tied to the financial sector, unpaid debt can be confusing. Paying off can minimize the impact it has on your attractiveness as a candidate.
Finally, you may want to consider paying off old debt if it all comes down to medical bills. Thanks to changes to the FICO scoring model, outstanding medical debt will not carry the same weight as credit cards, loans or other types of debt in the future. If you have bills that are in collections and you pay them, they will not negatively affect your credit. In fact, it can have the opposite effect, increasing your score by as much as 25 points. This is a definite advantage to keep in mind when you are discussing whether it is worth getting rid of old debt for good.