3 Tips for Paying Off Debt in Collections

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Kumiko Ehrmantraut

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Kumiko Ehrmantraut

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• How to Deal with Debt in Collections - April 14, 2021

There’s nothing fun about picking up your phone and hearing a debt collector on the other line. Opening your mailbox to find a pile of collection letters can make your stomach drop too. 

But when you’re working on your budget and trying to figure out which debts you should pay first, it’s usually best not to let pressure from debt collectors change your plan. Not paying a collection account because you can’t afford it right now doesn’t mean you plan to ignore the debt forever.

Eventually, you may come to a point financially where you’re ready to start tackling collection accounts. When the time is right, here are three smart tips for paying off debt in collections.

Tip #1: Research First

Unfortunately, we share our world with dishonest people. While there are many legitimate debt collectors, there are also scammers who will try to trick you and steal from you. If a collection agency contacts you, the first step you should take is to do a little research. 

• Check your credit reports. Find out whether the original debt is on any of your three credit reports. You can also check to see if a collection account has been added to your credit reports for the debt in question. 

Here are some helpful places to get copies of your credit reports:

• • Credit Karma
  • AnnualCreditReport.com

• Make sure the collection agency is legitimate. A real collection agency should give you a callback number. It should also tell you the name of the original creditor and how much you owe. You can call your original creditor directly to verify that the debt was sold or turned over to the collection agency who contacted you. Also, you can check for red flags of debt collection scams on the CFPB website. 

Read: Should You Cancel Your Credit Card After Paying It Off?

Tip #2: Know Your Rights

You may find that the collection account is real and the collection agency contacting you is legitimate. If that happens, your next step is to make sure the debt collector isn’t being shady or breaking any rules. 

Two main federal laws protect you where debt collection is concerned. 

• The Fair Debt Collection Practices Act (FDCPA)
• The Fair Credit Reporting Act (FCRA)

You can review a summary of your rights under both the FDCPA and the FCRA on the Federal Trade Commission website. 

Tip #3: Negotiate a Settlement in Full

Debt collectors are often happy to set up payment plans with you. But settling in one lump-sum is usually best. 

• A lump-sum settlement could cost less. Collection agencies buy debts for pennies on the dollar. When you call a debt collector and offer to settle a collection account in one lump-sum, you might be able to save as much as 50% or more off the debt. (Tip: Save the money in your own personal savings account before making the call.)

Remember, this is a negotiation. Be prepared to go back and forth a few times to get a better deal. Also, be sure to get the settlement agreement in writing before you pay a dime. Finally, recheck your credit reports around 30-45 days after settling to make sure the account shows a $0 balance. 

• Making payments can restart the debt collection clock. A creditor has the right to sue you over an unpaid debt, but only for a limited period of time. This time frame is different in each state, but it’s usually between 3-10 years. Once this time passes, the debt becomes “time-barred.”

Here’s the catch. If your debt is time barred and you make even a single payment toward a collection account, you might restart this debt collection clock. This could open the door for your creditor to sue you again for the unpaid balance.

Read: Saving Money When You Have Debt – What You Need to Know

Paid Collections and Your Credit

There’s a chance that settling a collection account could help your credit scores. But that’s not always what happens. It all depends on which credit score a lender chooses to use.

Lenders use different credit scoring models (basically complicated software programs) to read your credit reports and give you a credit score based on your risk as a borrower. Higher credit scores mean you’re more likely to pay back the money you borrow from lenders on time. Lower credit scores mean the opposite. 

The number you get assigned whenever your credit score is checked depends on the following:

• Which credit report is the lender reviewing? 
• Which credit scoring model is being used to “grade” your report?

Old vs. New Credit Scores

Some newer credit scoring models are designed to ignore collection accounts with $0 balances. So with newer scoring models, settling a collection in full might boost your credit score. 

Older credit scoring models, like the ones mortgage lenders use when you apply for a home loan, still consider paid collection accounts. With these scoring models, there’s little difference between a collection account with a $0 balance and one with a $4,000 balance. What hurts your score is the fact that you had a collection account at all. 

Unfortunately, if a lender uses an older scoring model to calculate your credit score, settling or paying a collection account probably won’t help you. The paid collection can still damage your scores until it’s eventually deleted from your credit reports.

This is why settling a collection account may sometimes help your credit scores and other times, it won’t. The lender chooses which scoring model it wants to use to calculate your credit score. You don’t have any control over this choice. But you can work to improve the information on your credit reports and build better credit for the future. 

Want to improve your credit? Here’s a helpful guide with three smart ways to improve your credit score quickly. 

Read: 4 Things You Need to Do Immediately If You Want to Pay off Debt

Should You Settle Collection Accounts? 

Whether you decide to pay your collection accounts is ultimately a personal choice. Here are a few reasons why settling a collection can be a smart idea. 

1. Settling a collection might protect you from being sued. If you don’t pay your debts, your creditors could decide to sue you to try to collect the money you owe. 
2. Paid/settled collections may look better to lenders. Settling a collection won’t necessarily raise your credit score. Yet a $0-balance collection account could look better to future lenders than negative, unpaid debt on your credit report. 
3. Taking care of old debts can give you peace of mind. Collection calls and letters can be stressful. When you settle collection accounts, these debt collection efforts should stop.

If a collection agency tries to collect a legitimate debt from you and you can afford to pay, it’s probably not a bad idea to take care of it. In the meantime, be sure to keep all of your current bills on time and pay down your credit card balances. These are two important steps that might improve your credit and possibly save you a lot of money.