Credit Q&A: Build Credit, Dispute Errors, and Prioritize Debt

Laura answers questions about how to build credit, manage credit utilization, correct credit errors, handle past due accounts, and prioritize debt the best way possible. Read or listen to the audio podcast for key tips to maintain good credit for life.

Laura Adams, MBA
12-minute read
Episode #505

Credit Question #4

Shanti M. says, “I have two accounts in collections and four high interest credit cards that are almost maxed out. I just got a low-interest loan to consolidate the debt. I want to boost my credit score quickly so I can be get a home loan. Which accounts should I pay first, the ones in collections or the high-rate credit cards?"


Thanks for your question, Shanti. Tackling debt in the right order is important because it helps you reduce the most interest, which can allow you to pay off your balances faster. Plus, there are serious legal consequences to consider when you’re in default and haven’t paid an account as agreed.

Tackling debt in the right order is important because it helps you reduce the most interest, which can allow you to pay off your balances faster.

The credit bureaus can keep accounts in your credit file for a certain amount of time. Those with positive information stick around for 10 years. Any accounts with negative information, such as late payments and accounts in collections, stay on your credit report for up to 7 years (except some types of bankruptcies, which remain for up to 10 years).

A common misconception about accounts in collection is that if you pay them in full or settle for a reduced amount, they instantly disappear from your credit report and boost your credit scores. The truth is that, as I mentioned, every old debt stays on your credit report until 7 years after the date it first became delinquent.

Having old accounts with negative information certainly hurts your credit scores; however, they become less damaging as they age. In addition, if you pay credit accounts on time each month, that new, positive data is a powerful way to repair your credit. But there’s another time limit you should be aware of called the statute of limitations. It sets a deadline for when a creditor can sue you for an unpaid debt. It varies depending on the state where you live, the type of debt, and your agreement with the creditor.

For instance, the statute of limitations on credit card debt in some states is three years, but in others it can go up to 10 years. And some debts, such as income taxes and federal student loans don’t have a statute of limitations because you’re never off the hook for them.

Even if the deadline for a creditor to sue you has passed, that doesn’t guarantee that they will disappear. Creditors can try to collect overdue money from you indefinitely because you still owe the debt. They can contact you and ask you to pay the debt or offer payment terms, but they can’t sue you once the statute of limitations has expired.

What’s important to know is that there are rules that allow the statute of limitations to revive or restart at day one, which is known as re-aging an old debt. For instance, in some states, the statute of limitations clock restarts any time you take an action on an old debt. The action could be something as simple as acknowledging that an old debt is yours, promising to make a payment, agreeing to a payment plan, or making a payment—no matter how small.

Once you re-age an old debt on purpose or by mistake, the creditor can sue you for the full amount owed. That’s a serious legal ramification you shouldn’t overlook.

Nevertheless, you may still decide to pay an old debt. For many, paying debt is a moral obligation that they want to honor, even after struggling through a financial hardship. A benefit to paying a debt in collections that hasn’t already fallen off your credit report, is that it changes the account status from “unpaid” to “paid,” which improves your credit.

Another option to consider is settling your old debt for less than you owe. Most collectors are very willing to settle for a partial payment. For instance, if Shanti owes $10,000 she could offer to pay $5,000 with an agreement to be released from any further obligation.

If you do negotiate a debt settlement, always get it in writing before making a payment. Otherwise it could be considered a partial payment, reviving the statute of limitations in some states, as I mentioned.

If you do negotiate a debt settlement, always get it in writing before making a payment. Otherwise it could be considered a partial payment, reviving the statute of limitations in some states, as I mentioned.

When you settle a debt that’s still on your credit report the status changes to “settled,” for the remainder of its 7-year history. This indicates that the debt was not paid in full, as originally agreed, and will have a negative effect on your credit scores. That’s better for your credit than leaving it unpaid, but is not as good as paying it in full.

So, my advice for Shanti is to get clear about how she feels about her debt in collections. If she wants to pay some amount to make sure that collectors don’t come after her, then I’d consider contacting them to negotiate a settlement. But if she can’t afford a settlement, thinks the debt is an error, or isn’t bothered by getting contacted from creditors then she could use her loan proceeds only for her credit cards.

Shanti, until your credit and financial situation improves, I wouldn’t even consider buying a home. Having two debts in collection and four maxed our credit cards tells me that your financial life isn’t stable enough to handle the added pressure of homeownership right now.

When you have poor credit, you’re either turned down for a mortgage or charged a sky-high interest rate. Paying for a home with an expensive mortgage is an unnecessary drain on your finances that I don’t recommend.

Credit scores don’t increase overnight; it takes time to rebuild credit, especially with serious black marks like accounts in collections on your record. It could take 12 to 24 months before your credit rebounds. Besides credit, home lenders evaluate you on other factors, such as income, employment history, debt-to-income ratio, and the total amount of your debt.  

Shanti, instead of thinking about making a big purchase, focus on reducing spending so you can improve your financial foundation. Get back to basics and work on the fundamentals. That includes building an emergency fund, investing a minimum of 15% of income for retirement, and having the right kinds of insurance to keep you safe.

Once you’ve achieved those key financial goals and cut your debt to reasonable levels, you’ll be in a much better position to own a home responsibly.

Related Content: 

Best Tips to Improve Your Credit Score

The Law About Debt Collections Harrassment (Podcast #314)

What Is a Mortgage Refinance? 5 Ways to Know If It's a Good Idea Podcast #476)

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlersbook is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.