Should I pay down credit cards or pay off collections?  The best way to increase your credit score is to pay down credit balances to less than 30% of your credit limit.  Moreover,  paying off some collections may even hurt your score initially.  If you are currently on the market for a home, consult a loan professional who will be able to run a complete credit analysis, give you an action report on what steps to take to increase your scores and then do a rapid rescore for you.  A rapid rescore can be done in less than 7 business days for those who are a few points away from meeting the loan guidelines. 

If you are not yet ready to purchase a home and have at least 6 months time line, the best course of actions are to pay all bills on time and pay down your credit cards debts.  If you have a thin credit file, open a new credit card account or secured loan from your bank using your saving account as collateral.  Also, dispute all errors or outdated accounts on your credit report.
These steps will help increase your credit scores and build up your credit.  

Following are things to consider if you decide to settle collections:

1. Age of collections -  Pay off the most recent collections first.  The older the collection, the less impact it has on your credit.   Also, try to negotiate a lower amount with the creditor or collection agency and request a letter of deletion.  If creditor does not want to remove the collection, ask them to report it as "paid in full" instead of "settled" to the credit bureaus.  Make sure all agreements are in writing before sending any money.  
 

2. Type of Collections -  Most lenders don't give as much weigh to medical collections as they do to other consumer debts.  Therefore, medical debts should be on the bottom of the list of collections to be paid off.  Additionally, keep in mind that the status and amounts owed  to the original creditor shown on the account will count more heavily in your credit score than information reported by the collection agency.  

3. Amount of Collections -   If collections are less than $5,000.00, then create an action plan on your own.   If collections are over $5,000.00, consider working with a credit counselor who can construct a total financial plan for your specific situation.   Click here  to find a HUD approved credit counselor in your area.