Reader Question: Recovering from collection accounts

This morning we received a question from Kevin L. about improving his credit score and recovering from collection accounts:

I have been working on cleaning up my credit report.  I am now left with 2 outstanding collection accounts and a credit score of 611. I also opened a "secured" credit card, and have the balance at $0.  My question is, do I pay off the old collection debts? If so, should I, or CAN I, even go to the original lender and pay them? One is for AT&T (now sold to Palisades), and the other is a credit union (now sold to Arrow Financial).  Both are from Illinois, and I have now relocated to Arizona. One is estimated to expire on 7/09, and the other is expiring 08/2008. Should I pay them? Or let them fall off and continue to rebuild with this secured card and try to get a car loan?

Kevin's situation is fairly common. It is one of those odd credit loopholes where doing the right thing (paying off the money he owes) may not actually be the best thing for his credit. Collection records remain on credit reports for 7 years, whether or not you pay the debt off. Kevin would only see a minor improvement in his credit score (related to reducing his overall debts) at best by paying off these collection accounts. The major credit score improvement will occur in 2 to 3 years when these records expire from his credit reports.

Paying these collection debts can still be a good move, however. It may not improve Kevin's credit score much but it can stop the collectors from calling him. Consumers can't go back to the original creditor to pay the debts in most cases. Once the debt has been sold to the collection agency, you need to work with that company directly to negotiate a payment deal.

In Kevin's situation, he can improve his credit score by using his secured credit card regularly and paying the balance off in full each month. After a few months of this responsible credit behavior, the offers for other types of credit will begin appearing in the mail. Opening an unsecured credit card or an auto loan is a great next step to help raise his credit score.

Next question? Share your questions or feedback in the comments section below. You can also email your questions to the CreditBloggers.com team.