Credit

3 Common Misconceptions About Negative Credit Reporting and Timing

Bad Credit

Every once in a while I spend some time reading through credit-related forums and blogs and (surprise, surprise) it seems as if many people are still confused about some of the timing when it comes to credit reporting and credit scoring.

Here are some of the more common misconceptions and their corrections.

Misconception #1

The statute of limitations regarding credit reporting and barring collectors from suing to collect debts are the same.

Correction: The above is incorrect.

The two statutes of limitation have nothing to do with each other. For example, if you defaulted on a debt in California, the collector cannot sue you after four years have elapsed.

However, the item can still be reported to the credit reporting agencies for seven full years. That means the collection will become a “time barred” debt a full three years before it can no longer be included on a consumer credit report.

Each state has their own statue of limitations regarding time barred debts, but there is only one universal statute of limitation for the credit reporting of negative information, which is the one defined in the Fair Credit Reporting Act.

There are many states where a defaulted debt won’t become time barred until well after seven years. Even so, the negative item must come off a credit report even though the owner of the debt can still sue you to collect.

And be careful — if you are sued and you lose, the judgment will remain on your credit report for seven years from the date it is filed with the court.

Misconception #2

If I make a payment on a defaulted debt or collection, I’m restarting the 7-year credit reporting time frame.

Correction: Thankfully, that’s incorrect.

Just imagine the lack of an incentive to pay derogatory credit obligations if each payment started the 7-year credit reporting clock over again and again.

The 7-year clock begins at a very well defined point in time relative to the original debt. Credit reporting can occur for no longer than seven years from the date the original debt was charged off (or subject to a similar action).

That means you can make payment after payment after it has been charged off or sent to collections and the date from which the counter begins cannot be updated to be any more recent.

FYI: There are exceptions to this rule for defaulted student loans.

Misconception #3

If a creditor sells a defaulted debt to a debt buyer or collection agency, the buyer can report the collection to the credit bureaus for seven years from that time.

Correction: One of nasty words in my industry is “re-aging.”

Re-aging, in the credit reporting world, is when a creditor or collector changes the date from which the 7-year credit reporting period begins to make it more recent, thus causing an item to remain on a credit report longer than the seven years allowed by Federal law.

Re-aging violates the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and countless state equivalents to those Federal laws.

It is a common (and completely legal) practice for a debt buyer to purchase defaulted debt from a creditor and then attempt to collect those debts. It is also common (and completely legal) for a debt buyer to sell those debts to another debt buyer so that the newest buyer can then attempt to collect those debts.

Again, this is completely legal. What is NOT legal is for any owner of the debt, present or past, to cause the “purge from” date associated with any negative credit report entry to be updated so that it causes the negative item to remain on a credit report longer than seven years from the original account’s charge off date.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.