Can I Pay a Collection With a Credit Card?

A collection account represents a debt that has become significantly past due. After missed payments, the original creditor may attempt to collect the overdue amount. If unsuccessful, the debt can be transferred to an internal collections department, sold to a third-party collection agency, or acquired by a debt buyer. This typically occurs after the account has been delinquent for 90 to 180 days. Once in collections, the new entity pursues the debt, holding the right to collect the outstanding balance.

Acceptance of Credit Card Payments for Collections

Many debt collection agencies and original creditors accept credit card payments for outstanding debts. However, this is not universally guaranteed. The ability to pay with a credit card depends on the specific policies of the collection agency or creditor, and the type of debt. Some agencies process payments using major credit cards, while others restrict options to bank transfers, debit cards, or money orders.

If a collection agency accepts credit card payments, the process typically involves direct payment over the phone, through an online portal, or via a third-party payment processor. Some credit card networks, such as Visa, have introduced rules regarding the use of their cards for certain overdue receivables. These rules may prevent the use of credit cards for debts over 120 days past due, or those not yet charged off or transferred to a third party. Collection agencies are now required to use a specific Merchant Category Code (MCC 7322) for these transactions, enhancing transparency and protecting cardholders.

Credit Reporting After Paying a Collection

Paying a collection account influences a credit report, but it does not instantly remove the negative entry. A collection account can remain on a credit report for up to seven years from the date of original delinquency. While the negative mark remains, paying the account updates its status on the credit report, which can be viewed more favorably by some lenders.

The status reported after payment can be “paid in full” or “settled for less than the full amount.” “Paid in full” indicates the entire original balance was paid, while “settled” means a reduced amount was accepted as complete payment. Newer credit scoring models, such as FICO Score 9 and 10, and VantageScore 3.0 and 4.0, may disregard or give less weight to paid collection accounts. However, older FICO models, still widely used, may not differentiate between paid and unpaid collections. The impact of a collection lessens over time, regardless of payment status, but updating the account to “paid” can still be beneficial for future credit applications.

Financial Implications of Using a Credit Card

Using a credit card to pay a collection account converts an existing unsecured debt into new unsecured debt on the credit card. This transfer introduces significant financial considerations, primarily due to high credit card interest rates. Average annual percentage rates (APRs) on credit cards can be substantial, with reported averages ranging from approximately 21.95% to 24.35%.

Carrying a balance on a credit card, especially at high interest rates, can quickly lead to accumulating more debt than the original collection amount. If the credit card balance is not paid off promptly, interest charges can considerably increase the total financial burden. Missing payments on the new credit card debt can also result in additional late fees and a penalty APR, potentially as high as 29.99%. This approach may also increase a consumer’s credit utilization ratio, potentially lowering their credit score.

Alternative Collection Resolution Methods

Consumers have several alternative methods to resolve a collection account. One common approach is negotiating a settlement for less than the full amount owed. Collection agencies or debt buyers often acquire debts for a fraction of their original value, creating room for negotiation. Consumers can propose a lump-sum payment, which collectors may favor for faster resolution, or arrange a payment plan.

Another direct method is paying the collection with cash or a debit card. This avoids the high interest rates and potential for accumulating new debt associated with credit cards. Consumers can also explore debt validation, formally requesting the collection agency to provide proof that the debt is legitimate. If the agency cannot validate the debt, they must cease collection efforts.

Key Steps Before Paying a Collection

Before making any payment to a collection agency, verify the debt. Consumers should send a debt validation letter, ideally within 30 days of first contact, requesting the original creditor’s name, amount owed, and documentation proving legitimacy. The collection agency must cease collection activities until they provide this verification.

Confirm the legitimacy of the collection agency. Consumers can research the agency online, check for a Better Business Bureau profile, and verify if they are licensed to operate in their state. Finally, obtain any payment agreement or settlement terms in writing before sending money. This written agreement should detail the settlement amount, payment schedule, and how the debt will be reported to credit bureaus.