Q: Right now, my credit score is below average because of a small medical bill that went into collections about 6 years ago. I’m on the market to buy a house but I know that the old debt will not look good when I go to the bank to get a mortgage. I know that the debt will be erased from my record after 7 years (1 more year to go). I hear that if I pay the debt, it’ll stick on my record for another 7 years. Should I wait or is there something else I can do?

The Eyes of New York / Flickr | http://www.flickr.com/photos/otto-yamamoto/8585191068/

The Eyes of New York / Flickr source

– Sara U.

A: Sara, there are two approaches available, depending on how soon you expect to apply for a mortgage.

First, by waiting a little longer for the delinquent account to fall off your credit reports, it means that you won’t be able to jump on a home purchase as quickly as you’d like. This may prevent you from picking up a good deal on a home, in the event that you find one.

Especially in today’s interest rate environment, when mortgage rates are on the rise, a delayed home purchase may also mean that you’ll face high rates when your credit profile has recovered. But, it’s worth noting that having a negative mark removed will result in a higher credit score, which improves your chances of getting a loan and a lower interest rate.

The other approach would be to address the debt directly and have it erased from your credit reports entirely.

You’re right that making a payment toward the medical debt will “reset” the 7-year clock. Doing so will cause the debt to be marked “paid in full.” While the account is no longer delinquent, the account history remains on the record for potential lenders to review.

Unfortunately, seeing a debt that went unpaid for six years is likely to raise an alarm and reduce your chances of qualifying for a mortgage.

Instead, you may negotiate with the debt collection agency to pay the debt, under the condition that the account is deleted from your credit reports. All history of the account will no longer appear and potential creditors won’t see it. Not every collections agency will agree to this, you should get a confirmation in writing if you take this route.

This proactive approach will allow you to bolster your credit scores much faster, which means you’ll be able to apply for that mortgage much sooner.

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