When you pull your credit report, there's a good chance that you might find old debts tucked away. Some of these might be so old that you've totally forgotten about them. The rule of thumb is that old debts fall off of your credit report after seven years. However, it's often not as simple as that. Put simply, there might not be any benefit to your credit score whatsoever by paying off really old debts.
The Two-Year Rule
Though Mike Sullivan, director of education with Take Charge America, says that "you can't just say that in 26 months it doesn't matter," he is quick to point out that "each month, the significance decreases." This is particularly true when debts become older than two years.
"Once you get to the charge-off stage, the worst impact is done," he says. "Every month after that, the old debts mean less and less."
He notes that if you're just looking at your credit report from a purely credit score point of view, there are two reasons to pay off an old debt: first, you want to avoid legal action from the creditor that might result in further damage to your credit score, and second, you want to avoid legal action that could result in a levied bank account or garnished wages. Sullivan also notes that you can negotiate a deletion in many cases. "It's not going to make a huge difference," he says. "But it will be helpful. Many collection agencies are very receptive to the idea and will act like it never happened." So if you're going to pay off an old debt, try to get it removed permanently.
Sullivan says that part of this depends on what your credit rating looks like right now. "If you have a good rating in spite of the delinquency, you might see a little bit of a bump," he says.
The Statute of Limitations...
Everyone talks about the seven-year limit on old debts, but this is a misleading time window. First, you might see old debts drop off before seven years. Second, each state has a different statute of limitations for debt, and different kinds of debts have different statutes of limitations. "At a certain point, the debt is no longer collectible," says Randy Padawer, a consumer education specialist with LexingtonLaw. "Each of the 50 states maintains their own laws with regard to the statute of limitations on debt."
For "open-ended accounts" -- credit cards and similar kinds of debt -- the statute of limitations ranges from three years in some states to ten in others. If you live somewhere with a very short statute of limitations, the debt can continue to linger on your credit report, but it can't be legally collected. Even if a creditor threatens to bring you to court, it's an empty threat. You have an affirmative defense in court for any debts that are past the statute of limitations.
A Special Case: Medical Debts and Federal Tax Liens...
Padawer has some good news. "Certain types of medical debt can be removed from credit reports once it's been paid," he says. He urges people to research which of their medical debts has to be removed and which doesn't.
What's more, paid federal tax liens can be removed from your credit report, but not paid state tax liens. "Consumers have to proactively request those revisions," says Padawer. "They don't happen automatically."
Additionally, Sullivan points out that some recent government mortgages ignore medical accounts and even some collection accounts. "The risk is even less than it was a couple years ago," he says.