Credit scores and car repossessions

Dear Terry,
One year ago I allowed my automobile to be repossessed. The original company sold the account to a collection agency. That collection agency states they can sue for $9,400. They are willing to accept $6,000 as a settlement. Can they sue and if I were able to pay would it be better for my credit score to pay the agreed amount or the balance in full?
-- Janice

Dear Janice,
Of course they can go to court and get a judgment for the full amount owed, but the collection agency is offering to settle for less because they know court action is expensive and may not result in them being able to collect anyway.

The question of whether you would improve your credit score by paying the full amount, instead of the discounted amount is much thornier. There are several factors to consider in whether to pay the full balance or the settlement.

On one hand, the damage is already done. You won't erase the collection for seven years, so you're stuck with at least one serious flaw in your credit for some time. If you have other negatives on the report, and your current score is very low, paying in full may not do much good, in which case you'd want to take the settlement offer.

But if this is the sole negative mark, it hasn't been there long and your credit is otherwise good, you might consider the full payment -- with one big condition. If, during negotiations, they agree in writing to report your payment in full to the credit reporting agencies, you might want to go the pay-in-full route. Once you have that letter in your hands, write that big check. While it won't erase the collections note, the "paid in full" notation on your credit could tip the balance and make some lenders consider you creditworthy at reasonable rates.