Are Credit Problems Cured by the Passage of Time?

20 December 2004, revised June 24, 2005, Reviewed July 17, 2009, February 3, 2011

"My credit record is terrible. I have been advised that if I just wait long enough and don't run up any more debts in the meantime, my terrible record will cure itself. Is this true? "

It is only partly true. You have to assist father time or he can't help you.

Credit Scores Will Not Improve Without Help From You

It is true that the force of negative information on your credit score declines as it ages, but this won't do you any good unless you now generate positive information. Old bad stuff plus recent good stuff generates a rising credit score. Old bad stuff followed by no credit activity results in a continued low score. This is a feature of all credit scoring systems.

The Federal Fair Credit Reporting Act Limits How Long Negative Information Stays on Your Credit Record

The Federal Fair Credit Reporting Act puts father time on your side by setting limits on how long negative information can appear in consumer credit records. Once a piece of information has been on a consumer's record for the prescribed period, it is supposed to drop off. Once off, it will no longer affect your credit score.

The prescribed periods are as follows: inquiries about you from credit grantors, 2 years; late payments, mortgage foreclosure, collection accounts and chapter 13 bankruptcy, 7 years; and chapter 7 bankruptcy, 10 years. Tax liens are on for 7 years from the date they are paid, but if they are not paid they remain on your report indefinitely.

The three major credit-reporting agencies (Equifax, Experian and Trans Union) have built purge routines into their data systems, but I have no idea how reliable the systems are. I am not even sure that all three follow exactly the same purge rules.

I found that on collection accounts, two of the companies purge 7 years after the date of the original missed payment, but the third purges 7 years from the date of the last activity! This means that the collection account of a borrower who pays it off after 6 years stays on the books of the third company for 13 years instead of 7!

It is a good idea for consumers who have adverse information on their credit records not to rely wholly on the purge policies of the three companies. Monitor them by periodically requesting your credit report. And if you happen to have a collection 'account, pay it as soon as possible, because the clock may not start ticking until you do. Read Don't Wait to Pay Off a Collection Account.

But I repeat, getting rid of all the bad stuff, by itself, does not give you a good credit score. To get a good score, your record must include evidence of payments made on time. If you don't take on any new debt, you are not generating such evidence.

"Years ago I had terrible credit habits and was chronically late on my credit cards, but for the last 5 years I have been out of debt. Will I be able to get a mortgage?"

It will be difficult.

Debtaholics on the Wagon Are Viewed as Poor Risks

Lenders are not interested in lending to debtaholics who have stopped all borrowing. A debtaholic who has not borrowed for a long period following a credit binge, during which time all the bad stuff fell off his credit report, is viewed as a bad credit risk. Lenders view a loan to such a consumer as akin to offering a drink to an alcoholic who has been on the wagon.

Is debtaholicism an incurable disease, like alcoholism, where complete abstinence is the only satisfactory way to cope? Or can debtaholics learn to use credit responsibly? I am inclined to believe that some of them can, but lenders will put the burden of proof on the borrower to demonstrate it.

To do that, you must establish new relationships with credit grantors who are prepared to deal with people who have bad credit histories. They are a tough lot: you will pay a high rate, you will be kept on a short leash, and when you fall behind in your payments, you will be badgered in every legal way, and sometimes beyond. This is the only way for them to make money lending to a population that includes a sizeable number of incurable debtaholics.

While these firms catch a lot of flak from community organizations who object to the way they treat borrowers, the firms perform an important public service: they give ex-debtaholics a second chance when no one else will. If you pay them on time every month, they won't badger you at all, and your credit score will gradually rise. In time, you can graduate from the class of deadbeats and enjoy the better terms available to borrowers who have demonstrated that they can handle credit wisely.

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