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

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

Having a debt in collections can be very stressful. When you have a new account going into collections, you may start getting pushy calls from the debt collector and they may be asking for money you don’t have. Additionally, your credit scores can take a big hit when a collection account shows up on your credit reports.

For many people, their instinct is to try to pay off debt. After all, paying off a collection account will improve your credit scores, right? Unfortunately, this is usually not the case. In fact, paying off your collection debt may not help you earn 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 need to pay off a collection debt, here’s how to approach it the right way.

Will paying 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 can cause the score to go up, down, or have no impact at all.”

This is because the damage to your credit scores has already been done. Even if you pay off balances now, your credit reports will continue to show accounts receivable for up to seven years.

Since your credit scores are based on the information in your reports, your scores will also be affected. However, the negative impact will diminish over time.

What are the benefits of debt collection settlement?

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

• Eliminating the possibility of being sued for the debt.
• Avoiding interest charges from debt collectors.
• Increase 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 debt collection. Plus, if you’re getting ready to apply for a mortgage, the lender may require you to pay off the debt before giving it to you. mortgage approval.

How to Pay Off Collection Debt for Less

If you don’t have enough money to pay off the full balances in your collection accounts, try to pay them off for less than 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 paying off your debt collection:

1. Pull your credit reports: Review your credit reports to find contact information for collection agencies. You can download 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 says 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 payment: Make your payment by money order or certified check. Don’t pay through your bank account or prepaid card, as the collector may try to charge you for more than your settlement amount.

How to rebuild your credit after collection

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 factors that affect your credit scores. You’ll also need to practice new financial habits to prevent further damage to your results in the future. Here’s what you can do to rebuild your credit:

• Make on-time payments on all your loans and credit cards.
• Stay current on all bill payments to avoid new collection debt. If you are struggling with a payment, contact the provider and ask for help.
• Keep your credit card balances low. Ideally, you should pay them every month.
• Avoid applying for new credit, as multiple applications in a short time will lower your scores.

Additionally, if you want a professional credit rebuilding strategy, one of your best options is to work with a NFCC Certified Credit Counselor. A counselor can review your credit reports and assess your current financial situation. They will also provide personalized advice for debt managementoptimizing your budget and improving your credit scores.

After all, credit scores are complicated. So no one can guarantee how much your results will increase as you implement each healthy habit. However, following the right debt repayment strategy and staying on top of future payments is a surefire way to improve your scores.