Consider debt statutes of limitations when paying off old card balances


A reader – let’s identify him by his initials, AR – contacted me for advice on paying off the debt. He’s already paid off about $10,000 in credit card debt by cutting spending and is paying considerably more than the monthly minimums.

This is great progress. But, unfortunately, he still owes just over $15,000 on three credit cards. Worse still, he recently learned that another $11,000 on a fourth credit card account had been transferred to a collection agency. He is considering debt settlement and is particularly worried about the newly discovered account in collections.

This account was a co-branded retail card. AR says the account got lost in the shuffle because another card issuer acquired the wallet. Moreover, he moved twice and completely forgot about the account. It recently appeared on his credit report when applying for an apartment rental.

The account has been inactive since 2016 and AR lives in California, where the statute of limitations for credit card debt is only four years. Although I feel borderline ethical in suggesting this, and have warned AR that I am not a lawyer, I believe he need not pay this amount since the statute of limitations has expired.

I’m normally a big proponent of paying off your debts

I don’t like debt settlement agencies that encourage consumers to stop paying their bills for a period of time, using them as leverage to try to negotiate a lower repayment amount. In my opinion, it destroys your credit anyway. The tactic might not work, but even if it does, you’ve racked up numerous late payments and an extra blemish on your credit reports for paying less than you owed.

But I’m also practical; $11,000 is a lot of money, and AR is already struggling under the weight of another $15,000 credit card debt. Damage to the account’s credit score in collections is almost gone by this point, as late payments stay on your credit reports for up to seven years (but the damage is greatest in the first two years).

And since his chances of being sued are very low due to the expiration of the statute of limitations, I see no practical reason why AR should pay this. Even if he tried, it would take a long time and hurt his other debt repayment efforts. Making even one payment would risk restarting the clock on the statute of limitations. I think what’s done is done in this case. He should leave this account alone and focus on paying off the three active accounts.

Credit Card Debt Repayment Strategies

Often I suggest a 0% balance transfer card to people who find themselves overwhelmed with credit card debt. However, I don’t think AR is a great candidate. He probably couldn’t qualify for a credit limit high enough to transfer the entire balance.

Additionally, the best balance transfer credit cards allow cardholders to pause the interest clock for up to 21 months. It’s a great offer for someone with a smaller balance, but it’ll probably take them over 21 months to pay off the $15,000. I think a better approach would be to engage with a reputable nonprofit consultancy such as Money Management International.

They often enroll their clients in debt management plans with interest rates of around 6% for around four years. A example scenario depicted on the agency’s website is quite close to AR’s situation. In this example, someone with $18,150 in credit card debt could pay it off in four years for a total cost of $21,828 (the original amount plus $2,445 in interest and $1,233 in fees).

This certainly beats the alternative scenario that Money Management International lists, which is $18,150 at 27.77% with only minimum payments. This calculation is brutal: it is equivalent to a total cost of $58,723 over nearly 30 years. This reflects what a person with a low credit score might be charged by a credit card issuer. At the average credit card interest rate (17.13%), it would take over 26 years and a total of $42,749 to eliminate this debt if you only make minimum payments.

Obviously, in addition to strategies that can lower your interest rate – like a 0% balance transfer card, a debt management plan offered by a nonprofit credit counseling agency, or a loan staff – it is important to pay well above the minimum if you can. . Taking a step back, selling things you don’t need, or cutting back on your expenses would also help.

The bottom line

If you have credit card debt – and about half of active cardholders do, According to the American Bankers Association — it is essential to prioritize your interest rate. Forget the rewards for now and focus on getting the lowest interest rate possible for the longest period of time.

Have a question about credit cards? Email me at [email protected] and I’d be happy to help.

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