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

Editor’s Note: This post was originally published in August 2017. 

Having a debt go to collections can be highly stressful. When you have a new account show up in collections, you might start receiving pushy calls from the debt collector, and they may ask for money you don’t have. On top of that, your credit scores can take a huge hit when a collection account shows up on your credit reports.

For many people, their instinct is to try to pay off the debt. After all, paying off a collection account will improve your credit scores, right? Unfortunately, that’s not usually the case. In fact, paying off collection debt might not help you gain a single point. 

With that said, you may have other reasons to pay off the account, such as avoiding an impending lawsuit from the collector. If you do need to pay off a collection debt, here’s how to approach it the right way.

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.

What are the benefits to paying off collection debt?

Paying off collections won’t necessarily help your credit scores, but 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. Plus, if you’re preparing to apply for a mortgage, the lender may require you to pay off the debt before giving you mortgage approval.

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 of paying for their services, use this DIY approach to settling your collection debts:

1. Pull your credit reports: 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 lump-sum payment: Debt collectors buy debt at low prices, so you can often negotiate a settlement for 40% to 50% of the full balance. Just make sure you have the funds available before agreeing to a payment amount.
3. Get it in writing: Ask for a written agreement that states your settlement amount will be accepted as “payment in full.” Additionally, you can ask the collector to include a statement that they will remove the account from your credit reports. Note that the collector is not legally obligated to remove the information, even if you have a written agreement.
4. Send the payment: Make your payment via money order or certified check. Do not pay through your bank account or a prepaid card, as the collector may try to charge you for more than your settlement amount. 

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 in the future. 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. A 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 payments is a sure path to improving your scores.