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I have about $6,000 of very old debt. It went into collections about 3 years ago when I was in college.

Today I have a good job, and I am thinking about the future. I am now interested in improving my credit because I want to try and buy a house in the future. I am hoping to try and get a mortgage at the end of this year, or perhaps some time next year. However this timing is flexible.

For the past few years I have been working on timely payments, creating new credit, and slowly improving my credit. So my credit score is now up to 628 (based on my free credit report).

I want to get a mortgage, but I am not sure what to do about this old debt. No one calls me about this debt anymore. I used to receive settlement offers for about 30% of the owed value. But I don't want to ruin my chances of getting a mortgage in the future by making the wrong decision.

So I wanted to know, roughly, how each of these decisions would affect my chance of getting a good mortgage:

  1. Ignore the old debt.

  2. Settle the debt for 30% of its value.

  3. Payback the value in full.

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    How is this debt described on your credit report? – Hart CO Mar 11 at 20:18
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    It appears under closed accounts with a status of "negative". It doesn't appear in collections. – Tyler . Mar 11 at 20:22
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    Regarding the house, just make sure it's a good option for you. Some good reading on the subject jlcollinsnh.com/2013/05/29/… – topshot Mar 12 at 13:49
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While you might be able to ignore it, as long as the debt is listed on someone's books, there is a chance they will resume active collection attempts. I wouldn't be comfortable with that possibility hanging over my head. So I'd eliminate option 1.

Between options 2 and 3 ... If you can get the debt cleared at a $4200 discount, you should take advantage of that opportunity. Reach out to the lenders (or the collection agencies, if applicable) and tell them you'd like to take them up on their earlier offer of 30%. (You could even start lower, say 20%, if you enjoy negotiating.) But don't send them any money until you get it in writing that the discounted amount will be considered a complete payoff of the debt. And only pay them by sending them money -- don't give them electronic access to your checking account.

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    You could improve this answer by explaining how the paid off debt will appear on the credit report moving forward, compared to how it appears today, and for which models. I'm not sure all FICO scoring models will treat the payoff as a good thing. Though, since OP wants to get a mortgage in 1 year instead of, say, 4 years, I'm inclined to agree. – TTT Mar 11 at 22:14
  • @TTT Those are good points, but I don't know enough to address them. If you have any insight into how such a payoff might appear on a credit report, feel free to add it to my answer. – Doug Deden Mar 11 at 22:18
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    I'm not well versed in what happens after paying off old debt (since I don't have personal experience with it). I believe it helps your score in newer models, and possibly helps a little bit in older models, but I think it could reset the fall-off timer too. (I think if the debt were 6 years old the advice might be to ignore it.) I'm sure someone else can add some better insight. – TTT Mar 11 at 22:23

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