Confronting your past is sometimes difficult, especially if it includes a time when your bills went unpaid.
Here’s an email I got last week…
I had a question asked of me today that I tried searching online, but answers came with some terms I didn’t really quite comprehend so I was hoping you could help me (us) out.
A friend of mine is looking to buy a house by the end of the year and hasn’t had a credit report in the last 2-3 years. However, they had credit cards that haven’t gotten paid in almost 10 years. Is it true that bad credit disappears from your credit report after 7-10 years of not paying?
Any/all pointers welcome so I can pass it along. Thanks! - Dori
It’s true that most bad marks on your credit history, including late pays, should disappear after seven years.
So if your friend simply stopped paying their credit cards 10 years ago, they may be in the clear. But there are some exceptions to the seven-year rule, and they really need to find out where they stand sooner rather than later.
When it comes to mortgages, bad credit is exceedingly costly. For example, according to credit score creator Fair Isaac, top-tier borrowers today can get a 30-year mortgage at only 3.581 per cent, while those with the worst credit might have to pay 5.17 per cent for the same loan.
If that doesn’t look like a big difference, then it proves looks are deceiving. Borrow $300,000, and the better credit score will have monthly payments of $1,361 and pay $189,865 in interest over the life of their loan, assuming they make minimum payments. The bad credit score will have monthly payments of $1,642 – $280 more – and over the life of the loan will pay $291,040 in interest.
In case that didn’t hit home, I’ll rephrase: The borrower with lousy credit will pay $100,000 more for the exact same product: a 30-year mortgage. So it pays – quite literally – to have good credit, and never more so than when you’re borrowing big, as with a mortgage loan.
The good news is your friend is starting early enough in the process to see what’s happening with their credit and, if there’s a problem, do something about it.
The first thing they need to do is go to AnnualCreditReport.com and get a free copy of their credit report from at least one of the big three credit reporting agencies (TransUnion, Experian, and Equifax) and see what’s on it. To be thorough, it might be better to get all three.
With this information in hand, your friend is now in a position to see where they stand and determine their next move. If they’re lucky, those old unpaid debts will have faded away, leaving nothing ugly in their wake.
But don’t be surprised if some remnants of that delinquent past remain. How can unpaid debts more than 10 years old still leave traces? Let’s count the ways…
The Credit Reporting Agency screwed up: This happens more often than you might expect. While the law requires most bad marks more than 7 years old to be removed from a credit history, it doesn’t always happen. Solution? Call, email, or write the offending agency and demand they be removed. It’s not hard to do – see 3 Steps to Improve Your Credit History for more details.
Your friend has the dates wrong: For credit card debts, the seven-year clock starts ticking based on the date of delinquency. But there are exceptions, and one of them is charge-offs. To show you what I mean, check out this example:
• January 1, 2003: Your friend misses their credit card payment and it’s reported to the credit bureau.
• June 1, 2003: The account is charged off – in other words, the bank decides they’re not going to get paid and they write off the account and take a loss on their books.
• December 1, 2003: The bank sells the charged-off account to a collection agency.
If there was no charge-off, the delinquency should stop showing up on Dec. 31, 2009 – seven years from the date they were late. But the rules for charge-offs are slightly different: They get reported for seven years + 180 days from the date of the delinquency. Since the date of the delinquency was Jan. 1, 2003, it should stop being reported on June 29, 2010.
A collection agency is attempting to game the system: In the example above, the bank sold the account to a collection agency. Say the collection agency couldn’t collect either, then sold it to another collection agency for pennies on the dollar in 2009. In an attempt to collect the debt, the new agency reports it to a credit reporting agency as a new delinquent debt. Then they contact your friend and tell them that unless they pay the debt, their credit score will take a huge hit.
What I just described isn’t legal, but it does sometimes happen. The law starts the seven-year clock based on the delinquency – in the example above, Jan. 1, 2003. The number of times a debt is transferred from one collection agency to another is irrelevant and changes nothing. The clock still starts ticking on Jan. 1, 2003. That should stop unscrupulous collection agencies from preying on uninformed consumers by attempting to scare them into paying. But it sometimes doesn’t.
If you see a dead debt come back to life on your credit report, the last thing you want to do is make a payment on it – that can sometimes restart the seven-year clock. The first thing you want to do in that case is talk to a consumer lawyer – see Abused by a Debt Collector? Get a Free Lawyer.
Got a question you’d like answered or a problem you need help with? Drop me a line and I’ll try to help. Please keep in mind, however, that if I don’t respond, it doesn’t mean I don’t love you. I just get more questions than I have time to answer.