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“Should I Pay Off A Six Year Old Debt Or Just Ignore It?”

woman with help signI saw this question asked in a forum on personal finances. It was about a $400 debt from six years prior. The woman who asked the question reported that the statue of limitations in her state for collecting debts had elapsed. Since her creditor could do nothing to collect the debt she was wondering if she should just let it go until the seven years had elapsed and it dropped off her credit report.

It may be more than seven years

The mistake this woman was making was to think that this debt would definitely fall off her credit report after seven years. The rule is that debt doesn’t fall off seven years after it was acquired. It falls off seven years from the last collection notice or the last time you communicated with the collection agency. If at any time this woman had agreed to a payment plan or made any sort of payment, it would be seven years from then, plus 180 days.

Just pay it

Regardless of when the $400 debt will fall off or not fall off her credit report, the woman should pay the debt. It’s the honorable and ethical thing to do. If she pays it off, she’ll probably feel less guilty. Plus, an old debt like this could come back to bite her on the seat of her pants some day. This is because it might fall off her credit report but that doesn’t mean her creditor will ever forget it.

What happens when you default on a loan?

In this woman’s case, the debt was for cell phone service. While you might not think of this as a loan, it really was. Her cellular service provider had in effect loaned her money to use its service for 30 days (or longer). Credit cards and cell phone services are both technically loans. So, too, are medical bills and personal lines of credit. And how you treat these will have a serious impact – either negative or positive – on your credit score.

Do you understand the importance of your credit score?

If you’re not familiar with a credit score, it is a three-digit number that can vary from 300 to 850. The higher your score, the easier it will be for you to get credit. Conversely, the lower the score the harder it will be for you to get a new credit card, mortgage, an auto loan or any other form of credit. This is because whenever you apply for credit, your lender will first look at your credit score. In fact, in many cases it won’t look at anything but your credit score.

What’s good, what’s bad?

A credit score of 720 and above will generally get you the credit you’ve applied for and the best interest rates. But a score in the low 600s and below will make it difficult for you to get any credit and if you do, it will come with a very high interest rate. This is because potential lenders will see you at a poor credit risk and will charge you more to offset that risk.

Where your credit score comes from

A company whose name used to be Fair Isaac Corporation but is now known simply as FICO developed the idea of credit scoring. It’s based on a formula or algorithm that translates your credit report into a three-digit number. The three credit reporting bureaus, Experian, Equifax and TransUnion have created their own credit score called VantageScore, which is growing in popularity. But most credit providers still rely on the FICO score. So this is the score you should know. You can get it at the website if you are willing to sign up for a free 10-day trial subscription to its Score Watch program. Otherwise, you could buy it for $19.95.

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