If you have a debt in collections, then the quickest way to minimize the damage to your credit is to pay it off as quickly as possible. However, figuring out where to start can be daunting.
Whether you’ve just noticed a collection account on your credit report or you’ve been trying to find a way to get debt collectors off your back, you’ll need to understand what exactly collections are, what payment options you have, and what your rights are.
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What is a collection account?
A collection is a past-due debt that your creditor has charged off because they no longer think you’ll pay it. This usually happens after around 3–6 months of missed payments. 1
Creditors will then either transfer the debt to a debt collection agency or sell it to a third-party debt buyer, usually for only a fraction of the amount owed. 2 At this point, an item called a collection account will appear on your credit report and severely damage your credit score.
Debts that can be sent to collections
Generally speaking, only unsecured debt (meaning debt with no collateral) will be sent to collections. Below are some examples of debts that can go to collections:
- Credit card debt
- Medical bills
- Unsecured loans
- Utility bills
By contrast, creditors can cover their losses on secured loans (like auto loans and mortgages) by simply repossessing whatever asset you use as collateral.
How to pay off collections in 6 steps
If you have a debt in collections, the most important thing is to not ignore it. While this is a stressful situation, you have the power to resolve the debt and put it behind you once and for all.
Follow these steps to pay off your collection account:
1. Confirm that you actually owe the debt
Debt collectors have been known to make mistakes. It’s possible that they’ve confused you with someone else or that they’re asking you for more than you actually owe. In other cases, the person contacting you could be a scammer (potentially posing as a representative of a legitimate company).
Before you do anything else, follow these steps to verify any debt you’re contacted about:
- Look up the debt collector: Start by finding out which debt collector you owe, then check out our list of debt collection agencies for information on the company that’s contacting you. Once you confirm that your debt collector is legitimate, write down their contact info (we’ve listed the phone and address of each company).
- Send a debt verification letter: Send the debt collection agency a debt verification letter to make them prove that the debt is yours. Consider paying a little extra to send the letter by certified mail and get a return receipt, which will prove that the collector received it.
- Check your records: In their response to your verification letter, your debt collector should state the name of your original creditor. You should then check your own records to verify that the debt is unpaid and that the amount owed is correct.
2. Check your state’s statute of limitations
Every state has a statute of limitations on debt, which is the amount of time a creditor or debt collector has before they can no longer take legal action to force you to pay a debt.
The statute of limitations is typically 3–6 years, although it’s longer in some states. 4 After this period, it becomes a time-barred debt. Although time-barred debts can still stay on your credit report for up to 7 years, you have no legal obligation to pay them. 5
Before you make any payments, check whether your debt is nearing its statute of limitations. A partial payment can reset the age of a debt in some states, potentially opening you up to lawsuits from debt collectors. 4
3. Calculate how much you can afford to pay
Before deciding how to pay your collection, review your budget to see how much you can realistically afford to pay. This will help you in your negotiations with your debt collector.
If you can’t afford to pay your debt collector in full, then don’t worry. You have several options for paying your collections, and it’s in your debt collector’s best interest to come up with an arrangement that works for you.
4. Choose a payment method
Once you have an idea of how much money you can pay, it’s time to choose how you want to pay your collections. Here are your three main options:
- Lump sum payment: If you have enough money on hand, then paying off your debt in a single payment is a great option for two reasons. First, you’ll no longer need to deal with debt collectors. Second, your credit score will bounce back more quickly.
- Payment plan: If you can’t afford a lump sum payment, then negotiate with your debt collector to set up a manageable payment schedule according to your budget. Before making any payments, make sure you receive a document containing written confirmation of your agreement and carefully review the details of the payment plan.
- Debt settlement: As an alternative to fully paying off your collections, you can negotiate a debt settlement, which is where your debt collector agrees to accept a partial payment and forgive the rest of the amount you owe. You can negotiate yourself by sending a debt settlement letter or hire a debt settlement company to do it for you.
It’s worth noting that these options don’t all have the same implications for your credit. In particular, the last option can harm your credit score.
If you opt for debt settlement, your credit report may show the debt as “settled” rather than paid. Settled accounts aren’t as damaging to your credit as unpaid collections, but they’re often more damaging than collections reported as “paid in full” or “paid as agreed.” 6
5. Contact the debt collection agency
After you choose a payment strategy, it’s time to contact your debt collector. You can do so by phone, but it’s generally better to send letters so that you have a paper trail. Tell them how you’d like to pay and what you expect from them in return.
When you speak to your debt collector, make sure to ask them to do the following things:
- Provide their name and contact information: Find out the name and contact details of the representative you’re speaking with in case you have any issues later and need to contact them.
- Update your credit reports: Get confirmation that the collection agency will update the status of your collection account to “paid as agreed.” You can also ask that they remove the collection account from your credit report altogether (a practice known as pay for delete), but they may not agree.
- Mail a written copy of your agreement: It’s important that you receive a written copy of your agreement with the debt collection agency and carefully review the terms before you make any payments. This may come in handy if they don’t hold up their end of the deal.
6. Make your payment
Once you’ve thoroughly reviewed your written agreement with your debt collector, you can go ahead and submit your payment. Make sure that you retain receipts or bank statements as proof of payment and don’t pay by potentially untraceable means.
The same process applies to making payments to a debt settlement company. If you decide to hire a third party to handle your debt, confirm that all the information in the written agreement is accurate before paying any money.
Should you always pay off debts in collections?
Whether or not you should pay off a debt in collections is situational. It ultimately depends on your financial situation and your personal beliefs.
Here are several reasons why you may be better off paying your collections than leaving them unpaid:
Paying will minimize damage to your credit
As you know, collections can seriously damage your credit because they affect your payment history, which is the most important factor considered in the calculation of your credit score.
Fortunately, newer credit scoring models like FICO 9, VantageScore 3.0, and VantageScore 4.0 ignore paid collections, meaning that paying off collections can improve your credit score. 8 9 In some cases, your credit score will increase by up to 125 points when you pay off a collection account.
However, it’s worth noting that many lenders still use older scoring models in which paid collections still damage your score. Moreover, even if they’re paid, collections can remain on your credit report for up to 7 years, and creditors will see them if they run a credit check on you. 5
Failure to pay can result in legal consequences
One of the more serious consequences of ignoring debt collectors is that they may file a lawsuit against you. If they win their case, you’ll probably receive a court judgment, which could give debt collectors the right to garnish your wages or place a lien (a legal claim) on your property. 10
As mentioned, if your debt has passed the statute of limitations, your collector can’t legally sue you over it, so this isn’t a factor. However, if they do try to file a lawsuit, it’s still important to show up to court to point out that the debt has become time-barred.
Where to get help paying off collections
If you need more guidance or you’re having trouble reaching an agreement with your debt collectors, then it might be worth getting professional help with debt collection.
Here are three places you can turn:
- Credit counselors: If you need help getting out of debt or you want financial advice, then look for a nonprofit credit counseling agency. Credit counselors can negotiate with your creditors or debt collectors on your behalf, and many also offer free educational material and financial resources.
- Lawyers: If you’re being sued by debt collectors, hire a lawyer. Your attorney will represent you in court and handle communications with your debt collector.
- Debt settlement companies: Debt settlement companies can help you negotiate a settlement agreement with debt collectors. However, bear in mind that the services these companies offer cost money and involve certain risks, such as the risk that debt collectors will sue you for continued nonpayment.
Whatever way you choose to pay your collections, remember that you’re not alone and that you always have options. Once you’re all paid up, you can start rebuilding your credit and take steps to strengthen your finances.
