A debt collection is a severely past due account that will make it difficult for you to get approved for new credit and loans. It's one of the worst types of entries you can have on your credit report.
If you have a collection account on your report, it’s likely affecting your credit score. This is especially true for more recent collections. You can improve your credit score by getting these collection accounts deleted from your report or at least having them reported as “Paid” or “Current.”
Before you pay off a collection account, first negotiate with the debt collector to have your credit report updated to something favorable. The only unacceptable scenario is to pay the collection without having having fact reflected in your credit report.
Here are some possible payment scenarios and outcomes, listed from most ideal to least ideal (but still acceptable).
Ideal - Get It Removed With Settlement
Negotiate with the debt collector to have the account deleted from your credit report in exchange for payment. Send a written request (a pay for delete letter) to the collector offering a settlement payment if the collector deletes the account from your credit reports. A settlement payment is an amount that's some percentage less than the total amount due. The more you're willing to pay, the more likely it is that the debt collector will work with you. Wait for a written response from the collector before taking any action.
If you prefer, you can contact the collector by phone to negotiate pay for delete. However, you risk inadvertently saying something to the collector that conveys responsibility or liability for the debt. You don't want to do this if you're beyond or nearing expiration of the statute of limitations. Even if you choose to negotiate by phone, you still need to have the agreement in writing. Have the collector mail or fax you a letter including the terms of the agreement before making a payment.
Here's a Sample Pay for Delete Letter you can use to negotiate with collectors. Remember, debt collectors don’t have to remove accurate entries from your credit report.
Next best thing - Get It Removed With Full Payment
Most collectors want payment in full and will not delete the account from your credit report for a settlement payment. When this is the case, offer to pay the account in full in exchange for the collector deleting the account from your credit report. Again, send your request in writing and wait until the collector responds in writing before making a payment.
Not as good, but still ok - Settled, But Reported as Paid In Full
Ideally, you want the entry completely removed from your credit report. Unfortunately, not all collectors are willing to do this even in exchange for payment. If you cannot have the entry completely removed, you should have it updated as “Paid in full.” Offer the collector a settlement payment some % less than the full amount owed. Get the collector to agree to update the account as “Paid in full.” The agreement should be in writing.
Acceptable - Settled, But Reported as Settled
Settle the account with the collector and accept an update of “Paid. Settled.” Keep in mind that a settled entry on your credit report will not boost your score as much as “Paid in full.” If you want your account to state “Paid in full” but cannot get the collector to do so for partial payment, then pay the account in full.
Acceptable - Pay in Full
There's nothing wrong with paying the full amount of a debt collection that you owe. Obviously, you'd never pay a collection that's not yours. If you don't remember the debt, follow the steps for the the debt validation process to have the collector send you proof that the debt is yours. Then, once you're satisfied that it's yours, you can send payment for the full amount of the debt.
After you pay the collection, file away your proof of payment. Monitor your credit report to make sure the collector updates the account as paid. If the collector does not update the account, dispute the account with the credit bureau, providing proof of payment if necessary.