Ask Credit Karma: What's the Best Way to Pay Off Debt?

Ask Credit Karma: What's the Best Way to Pay Off Debt?

Once you're ready to pay off your credit cards, where should you go first? One reader asks us about the best way to improve her credit score:

The Question:

Seriously, I did all the things in college they told you not to do about taking out a bunch of credit cards. I want to clean my credit up, but these cards are now in collection with goo gobs of collection agencies. So is it better to go back to the original creditor and pay off the debt or just pay off the collection agencies to improve my credit score?

The Answer:

First of all, congrats! Good for you for taking the first steps toward cleaning up and rebuilding your credit. You’re on your way back to credit health.
Now, to answer your question: Who you pay will largely depend on where your debt is located.

Is Your Collections Debt Still With the Original Creditor?

Some creditors have their own collections divisions called “first-party agencies.” Contact your creditor to find out if your debt is within that division or if it’s been sold to a third party.

If the Answer Is Yes:

If your creditor is holding your debt in collections, call the creditor’s service center to negotiate if you can arrange to have the accounts removed from collections status. This will allow you  to return to making payments on the account.

After seven years, debt in collections no longer appears on your credit report.

This is also beneficial to your credit because it should remove the derogatory mark on your credit report from having accounts in collections. You’ll just need to make sure you can manage the monthly payments and not allow them to go delinquent again. (Click here to learn how to ditch an old credit card that you're no longer using.)

RELATED: Debt 101 - Pay Off Your Credit Cards

If the Answer Is No:

If your debt has been sold to a third party, it’s most likely not an option to pay back the original creditor. Your creditor has written your debt off as a loss and is no longer responsible for it--the debt collection agency is.

In this case, you’ll have to work directly with the collection agency. Find out from the original creditor which collection agency has it, and then contact the agency to work out a payment plan. Whatever you and the agency decide, get it in writing. Make sure you have proof of your agreement in case any legal action becomes part of the process.

RELATED: Ready to Pay Off Your Credit Cards? Mistakes to Avoid

Collections Debt and Your Credit Score

Unfortunately, paying your collections debt in full does not remove it from your credit report. Generally, after seven years, debt in collections no longer appears on your credit report. If you pay it off before the seven-year mark, it will appear as “paid” on your credit report, which is better for your credit than having an unpaid collections account. (If you have rough credit history, click here to learn more about secured credit cards.)

After you’ve paid your collections debts in full, contact the three credit bureaus to make sure your report shows the change. If it’s been several weeks and the update has not been made, contact your creditors to make sure they take this action.

Before Applying for a Credit Card

Ask yourself these three questions

As you start paying off your debt, the initial new activity on your account will lower your credit score. But rest assured that as you start making consistent on-time payments, your score will begin to improve.

Want more help? Here's how to pay off your credit cards in 5 steps.

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