Getty Images/iStockphoto
Receiving a call or letter from a debt collector can be a stressful experience — but for many, it is also a wake-up call, signaling that a debt has gone unpaid for an extended period. After all, most credit card issuers won’t take this step until the 180-day delinquency mark, so by the time your debt reaches collections, it’s typically very overdue. But when the credit card company sells the debt to a collection agency, it triggers a negative mark on your credit report that can persist for many years.
Debt collections are a red flag for potential lenders that indicate you’ve struggled with repayment in the past and could do so in the future. That can make it tough to get approved for loans, credit cards or even a lease on a home or apartment. Given the credit repercussions, it makes sense to wonder whether the best approach is to pay off the collections to get rid of it. What you may not realize, though is that there can also be unintended consequences that come with paying off collections debt, especially in terms of your credit score.
While conventional wisdom suggests that paying off any debt is beneficial, the impact of paying a collection account on your credit score isn’t always straightforward. So what happens to your credit score if you pay off a debt collector? Will it drop — or will there be some improvement instead?
Get rid of your credit card debt today.
Will my credit score drop if I pay a credit card debt collector?
Paying a credit card debt collector typically won’t cause your credit score to drop. That said, when you pay a credit card debt collector, the impact it has on your credit score depends on various factors, including how recently the account went into collections.
In general, when you pay a collection account:
- The collection account will be marked as “paid” on your credit report
- The negative impact of the collection account gradually diminishes
- Your debt-to-income ratio improves
The impact on your credit score depends largely on:
- Which credit scoring model is being used
- How old the collection account is
- Your overall credit profile
- Whether you negotiated any special arrangements with the collector
For example, with older credit scoring models, paying off a collection account doesn’t automatically improve your credit score. Once a collection is reported, the damage is done, and the account remains on your credit report for up to seven years, whether paid or unpaid. However, recent credit scoring models treat paid collections more favorably, disregarding paid accounts when calculating your score. This means paying off a collection debt could lead to a score increase under these models.
That said, it’s important to note that some lenders may view a paid collection account as a sign of financial responsibility compared to leaving the debt unresolved. So, while your credit score might not immediately skyrocket, settling the debt could still improve your chances of securing loans or credit in the future, as lenders may perceive you as a less risky borrower.
Find out more about the debt relief options available to you now.
How to get rid of credit card debt collections
Dealing with debt collections effectively requires a proactive approach and a clear strategy. Here are some practical options to help you manage or eliminate credit card debt in collections:
Debt validation
Under the Fair Debt Collection Practices Act (FDCPA), you have the right to request validation of the debt from the collector. This means they must provide proof that the debt is legitimate and that they are authorized to collect it. To do this:
- Request debt validation within 30 days of first contact
- Verify the debt collector’s right to collect
- Confirm the debt amount and age
- Check whether the statute of limitations has expired
If they cannot provide this documentation, you may have grounds to dispute the debt and potentially have it removed from your credit report.
Debt forgiveness (or debt settlement)
Debt forgiveness involves negotiating with the debt collector to pay less than the total amount owed. For example, if you owe $5,000, the collector might accept a lump sum payment of $3,000 to close the account. While this strategy won’t remove the collection from your credit report, it will mark the account as “settled” or “paid,” which is generally better than leaving it unpaid. If you take this route, aim to settle for 30% to 50% of the original debt and be sure to get all agreements in writing before paying.
Debt management
A debt management plan is a structured repayment program offered through credit counseling agencies. With this type of plan, the agency negotiates lower interest rates or payment terms with your creditors and consolidates your debts into one manageable monthly payment. While this won’t erase collections immediately, consistent payments under the plan can prevent further accounts from going into collections and help rebuild your financial stability over time.
The bottom line
Paying off a credit card debt collector is an important step in addressing financial challenges. However, the impact that paying off collections can have on your credit score depends on the circumstances and the scoring model used. While doing so may not immediately boost your score, though, resolving collections can improve your finances and prevent further legal or financial complications.
