To use credit or not to use credit when paying off collectors, that is the question…

When facing collection accounts, many consumers wonder about using credit cards as a payment method. Can you? Should you? This article explores the feasibility, implications, and wisdom of paying debt collectors with credit cards, examining both the technical possibilities and the financial ramifications of this approach.

The technical feasibility

Most debt collection agencies do accept credit card payments, though their policies vary significantly. Some collectors readily accept major credit cards, while others may limit payment methods to bank transfers, money orders, or debit cards. The acceptance of credit cards often depends on:

• The collection agency’s payment processing capabilities.
• Their internal policies regarding payment methods.
• The original creditor’s requirements.
• The type of debt being collected.

Third-party payment services

Some debt collectors work with third-party payment processors that can facilitate credit card payments. These services might include:

• Online payment portals.
• Payment processing companies.
• Money transfer services.

However, these services often charge additional processing fees, typically ranging from 2% to 4% of the payment amount, which adds to the overall cost of the debt repayment.

Legal considerations

The Fair Debt Collection Practices Act (FDCPA) regulates how debt collectors can interact with consumers, including payment processing. When accepting credit card payments, collectors must:

• Provide clear documentation of the payment.
• Ensure secure processing of credit card information.
• Follow all applicable privacy laws.
• Maintain accurate records of the transaction.

Payment authorization requirements

Using a credit card for debt collection payments requires explicit authorization. This typically involves:

• Written or verbal consent.
• Clear disclosure of any processing fees
• Documentation of the payment agreement.
• Confirmation of payment receipt.

Financial implications

Using a credit card to pay a debt collector essentially means transferring debt from one creditor to another, often with significant cost implications:

Interest considerations:

• Collection accounts typically don’t accrue additional interest.
• Credit card interest rates often range from 15% to 25% or higher.
• The debt may grow substantially due to compound interest.

Example:

A $5,000 collection debt paid with a credit card at 20% APR, making minimum payments:

• Original debt: $5,000
• Total paid with minimum payments: approximately $9,500
• Time to repay: 7+ years
• Additional interest cost: $4,500

Impact on credit scores

When you pay off debt collectors with credit, the effect on your score can be complex.

Positive potential:

• The collection account might be marked as paid.
• Debt-to-income ratio remains unchanged.
• Possible settlement notation removal.

Negative potential:

• Increased credit utilization ratio.
• New credit card debt appears.
• Multiple credit accounts with high balances.

When it might make sense

Using a credit card to pay a debt collector could be reasonable in specific situations…

Zero interest promotional offers

If you have access to a new credit card with a 0% APR promotional period, this could provide breathing room to pay the debt without additional interest. However, this requires:

• Sufficient credit score to qualify.
• Ability to pay off the balance during the promotional period.
• Careful planning to avoid future debt cycles.

Legal pressure

If facing legal action from collectors, a credit card payment might help:

• Stop immediate legal proceedings.
• Prevent wage garnishment.
• Avoid bank account levies.

Settlement opportunities

If the collector offers a significant settlement discount requiring immediate payment, using a credit card might be worthwhile if:

• The settlement savings exceed potential credit card interest.
• You have a solid plan to pay off the credit card quickly.
• The settlement terms are clearly documented.