Is it worth paying your old credit card debt?

February 5, 2012, 11:58 am | Business

There has been a lot of debate about old unpaid debts and how they should be handled. If you have unpaid credit card debt from several years ago, you might be wondering how much harm it’s doing to your credit score. Collection agents may still hound you about the unpaid balance. Should you pay up or forget about it?

Every state has its own statute of limitations on debt. That is, the debt cannot be collected after a certain amount of time has elapsed. (This time limit varies by state, so check your local legislation to know your rights.)

The tricky part comes when you make a payment or otherwise acknowledge the debt and attempt to deal with it: the statute of limits timer resets to the most recent date of activity on the account, and the debt is once again fair game for collectors.

Some consumers are content to let the old debt fall off of their credit reports, which it will do after 7 years. But there are plenty of reasons to pay off your old debt, even if it has technically expired.

Consider these points:

Paid debt is better than unpaid. If you’re planning to take out a loan or make a major purchase, pay off your unsettled debts to save your credit score. Lenders look at resolved accounts much more favorably than old, unsettled debts. Also, your credit score won’t suffer as badly if you pay off your old debts.

You could be taxed. Collectors are within their rights to report any unpaid, uncollectible debt as income – for you. They can notify the IRS of this ‘income’, in which case you’ll be responsible for income tax.

It’s just the right thing to do. When consumers default on their credit card debt, it causes hardship for all cardholders. Credit card companies raise rates and tighten their lending criteria to recoup their losses, preventing new cardholders from qualifying for good credit card terms – or any credit cards at all.

Should you pay off your old credit card debt? The choice is up to you, but many consumers find it worthwhile to pay off their delinquent accounts for the sake of repairing their credit score.

That three-digit number defines you financially, and a low credit score may keep you from getting a loan, an apartment, or even a job. Keep that in mind when you choose how to handle old debts.

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