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20 December 2004, revised June 24,
2005
"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.
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.
Copyright Jack Guttentag 2005
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