How Can I Improve My Credit Scores After Having Debt Sent to Collections?

 The NFCC often receives questions from readers about their money challenges. We answer common questions in our Ask an Expert series to help readers find the information they need.

Question: I recently discovered my credit scores are below 600. I believe this is due to a few thousand dollars from different bills that went to collections in the past few years. I want to pay off my debt and improve my credit scores. What strategies should I use?

Answer: Dear Reader,

I applaud your initiative to tackle your debt and improve your scores. Choosing a good strategy is the right starting point.

When you have debt in collections, there are a few different ways you can go about managing the issue, but some approaches are less effective than others. Here’s what you need to know.

Will paying off collections improve your credit scores?

Unfortunately, paying off collection debt may not improve your credit scores. According to FICO, the company that invented the credit score, “Paying off a collection could cause the score to increase, decrease or have no impact at all.” 

That’s because the damage to your credit scores has already been done. Even if you pay off the balances now, your credit reports will continue to show the collection accounts for up to seven years. Since your credit scores are based on the information in your reports, your scores will be impacted as well. However, the negative impact will lessen over time.

While paying off collections won’t necessarily help your credit scores, there can be other significant benefits to paying off the accounts. They include:

• Eliminating the possibility of being sued for the debt.
• Avoiding interest charges from the debt collector.
• Increasing your chance of being approved for new loans or credit cards in the future.

In other words, you may have good reasons to pay off your collection debts, but it’s not a good idea to do this just to improve your credit scores.

How to settle collection debt for less

If you don’t have enough money to pay off the full balances on your collection accounts, try settling them for less than what you owe. You don’t need to hire a third-party company to do this for you. In fact, for-profit debt settlement companies often do more harm than good.

Instead, use this DIY approach to settling your collection debts:

1. Review your credit reports to find the contact information for the collection agencies. You can pull your reports for free at AnnualCreditReport.com.
2. Negotiate a settlement amount. Debt collectors buy debt at low prices, so you can potentially settle for 40% to 50% of the full balance.
3. Ask for a written agreement that states your settlement amount will be accepted as “payment in full.” Additionally, ask the collector to include a statement that they will remove the account from your credit reports. Note that the creditor is not legally obligated to remove the information, even if you have a written agreement.
4. Make your payment via money order or certified check. Do not pay through your bank account or a prepaid card. 

How to rebuild your credit after collections

Even if you have debt in collections, you can work to add positive information to your credit reports and rebuild your credit scores.

To do this, you need to understand the factors that impact your credit scores. You’ll also have to practice new financial habits to prevent doing more harm to your scores. Here’s what you can do to rebuild your credit:

• Make timely payments on all of your loans and credit cards. 
• Stay current on all bill payments to avoid new collection debt. If you’re struggling with a payment, reach out to the provider and ask for assistance.
• Keep your credit card balances low. Ideally, you should pay them off each month.
• Avoid applying for new credit, since multiple applications in a short amount of time will lower your scores.

Additionally, if you want a professional strategy for rebuilding credit, one of your best options is to work with an NFCC-certified credit counselor. Your counselor can review your credit reports and evaluate your current financial situation. They will also offer personalized tips for managing debt, optimizing your budget and improving your credit scores.

Ultimately, credit scores are complicated. So no one can guarantee how much your scores will grow as you implement each healthy habit. However, following the right debt repayment strategy and staying on top of future debt payments is a sure path to improving your scores. 

Sincerely,
Barry Coleman, Vice President of Counseling & Education Programs

Barry Coleman has over 16 years’ experience in the credit counseling industry previously holding  several management positions in training, regulatory compliance, and financial counseling.  Barry holds a Bachelor of Arts Degree in Organizational Management from Ashford University and a Master’s of Business Administration Degree from Ohio University.  In addition, Barry served over 32 years in the United States Air Force and the Air National Guard, retiring in 2010 as the State Command Chief Master Sergeant of the Virginia Air National Guard.
 
 
 
 

If you have a question about your own specific financial situation, don’t hesitate to submit your question to our experts today! If you would like a thorough review of your personal financial situation, contact one of our nonprofit credit counseling agencies today!

*Some questions have been shortened and/or altered for publication purposes while others have been published as is