By Dana Dratch
That free advice you get from friends, co-workers or the “charming” bill collector on the phone could be worth even less that what you paid for it.From the perils of acknowledging old debts to the odds of “inheriting” financial obligations, here are nine myths that need to be permanently busted, along with a few things it pays to know about debts:
Myth No. 1: Paying old debt always raises your credit score
Not always. This much is true: If a debt is seven years old or younger, and it’s on your credit report, paying it could improve your credit score, says Anthony Sprauve, spokesman for myFICO, a division of FICO. How much depends on how old the debt is.
The myth part comes in if a debt is too old, or isn’t on your credit report.
If a debt is older than seven years, by law it should have already come off your credit report. So repaying it won’t raise your score because it’s no longer considered, says Sprauve.
In fact, if the debt is younger than seven years old and for some reason is not on your report, paying it could potentially lower your score, Sprauve says. The reason: If the collector reports the payment to credit bureaus, suddenly that old debt will be added to your report. Even though the debt is now paid, it’s a negative mark your report didn’t previously have.
When it comes to debt, time really is on your side. New debts affect your score more than old ones, says Laura Udis, senior financial services advocate at the Consumer Federation of America.
Myth No. 2: Paying an obligation ‘restarts’ the clock on your debt
Half right. There are two clocks to consider. One is the length of time in which a creditor can force payment on a debt. The second is the length of time a debt can stay on your credit reports.
- Forced-collection clock: Under state statutes of limitations for debts, creditors can use the courts system only so long to sue you for debt, get a judgment and garnish wages. But watch out: A consumer can unwittingly restart the collections clock on old debt, says Gail Hillebrand, associate director for consumer education and engagement at the Consumer Financial Protection Bureau. Acknowledging a debt (verbally or in writing), making a partial payment or accepting a payment plan can all risk “re-aging” the debt, restarting that clock.
- Credit history clock: No matter who owns the debt, how many times it has been sold or whether you acknowledge it, it has to come off of your credit history after seven years, says Chi Chi Wu, staff attorney at the National Consumer Law Center.
And it’s illegal to tag an old debt with a new “birthday,” she says.
This seven-year clock starts 180 days after the last payment the consumer made on the accounts.
One notable exception to the seven-year reporting rule: collection judgments. A judgment is considered a separate item from the original debt, Wu explains.