You may ask, “Exactly what do credit repair companies do?” after you see their ads promising to fix your credit. It’s a fair question because, on first impression, it may seem that they have some secret sauce to improve your bad credit.
These companies speak of “opportunities to raise your scores” or embarking on a “credit repair journey.” Separating the steak from the sizzle, it’s clear that credit repair companies can’t guarantee you a higher credit score.
Nonetheless, the best credit repair companies work hard to remove errors and unverifiable negative items from your credit reports. And for many clients, the payoff is indeed a higher credit score. Considering the typically moderate cost, that’s not a bad deal.
Credit Repair Companies File Disputes With the Credit Bureaus
Much of the consumer finance industry relies on the three major credit bureaus (Equifax, Experian, and TransUnion) for the information necessary to support lending decisions. Lenders and creditors use credit reports and credit scores to decide whether to grant applicants a loan or new credit card and, if so, how much to charge.
The process starts with vast data collection. Creditors and lenders report their customers’ account histories to one or more credit bureaus each month. The data includes payment history, balances, the type of accounts a borrower has, and when they were opened or closed, among other things.
A credit bureau (or credit reporting agency) collects the information, processes it, files it away, and then sells it to lenders, credit card issuers, and other interested parties. In doing so, they must conform to the rules set in the Fair Credit Reporting Act.
The two chief products are consumer credit reports and credit scores. The credit reports contain a consumer’s lending history, while credit scores encapsulate that history into a single number.
FICO is the leading credit scoring system. Its scores range from 300 (worst credit) to 850 (perfect credit). FICO scores rely on five factors — payment history, amounts owed, age of credit accounts, new credit, and credit mix — that feed its proprietary algorithm. Consumer FICO scores can be the most important factor governing a borrower’s access to credit.
The credit bureaus buy licenses for the FICO system (among others), apply their credit databases to it, and generate consumer credit scores.
Your credit score depends on your credit history, and as the saying goes, garbage in, garbage out. In other words, invalid data can damage your credit score. The job of credit repair companies is to dispute any questionable data on your credit reports.
What Do Credit Repair Companies Do? |
---|
Analyze Your Credit Report |
Dispute Negative Items |
Escalate Disputes |
Provide Mentoring |
When a credit repair organization wins a dispute on your behalf, the credit reporting agency must fix or delete the error and recalculate your credit score. The bureaus have 30 days to resolve these disputes.
Credit repair companies look for all sorts of errors and unverifiable data, from accounts you didn’t open and inquiries you didn’t authorize to payments mistakenly labeled as late.
The companies work with you to uncover, document, and dispute these errors. The credit repair process can boost your credit score and alert you to identity theft or other types of fraud.
Credit repair companies typically charge a monthly fee of $50 to $150 for their services. Subscriptions usually run from four to six months, but you can cancel anytime. As a subscriber, you’ll receive periodic alerts about the company’s credit repair work, including reports of dispute activity and updates to your credit score.
Can I Fix My Credit on My Own?
Under the Fair Credit Reporting Act, you can dispute your credit reports independently if you have the time and expertise. While credit restoration isn’t trivial, most folks can perform DIY credit repair for little or no cost.
One benefit of fixing your own credit is that you won’t expose yourself to a credit repair scam.
You can begin the process by getting free copies of your three credit reports from annualcreditreport.com. Although the three reports have unique formats, they share the same types of information:
- Personal information: Credit reports identify your name, address, date of birth, and Social Security Number. They may also include your job history, current income, and more data.
- Accounts in good standing: These are open or closed accounts containing no negative information. Data includes account type, original loan amount or credit limit, current balance and status, and payment history.
- Derogatory information: These are adverse credit items, including late payments, debts associated with a bankruptcy, charge-off accounts, collections, repossessions, foreclosures, settlements, and bankruptcies. These items remain on your credit reports for seven to 10 years.
- Credit inquiries: Your reports track hard and soft credit inquiries for 24 months. The hard inquiries are visible to any report recipients, but only you can see the soft ones. Hard credit pulls affect your credit score for up to 12 months.
If you find errors in your credit reports, you can file disputes with the credit bureaus online or via mail. Each dispute should involve a single item on one credit report. You must explain the problem, request the removal or correction of the erroneous information, and include documentation to support your challenge.
The Consumer Financial Protection Bureau offers instructions and template letters to guide you through the credit restoration process. You can also dispute errors with the companies that provided the incorrect information.
If you prevail, the credit bureau will fix the report, recalculate your credit score, and send the corrected information to recent report recipients. Even if the credit bureau verifies the item is correct, you can append a statement to your credit report explaining your point of view.
You can also appeal a negative outcome, but you should only do so if you can provide additional information and documents that support your claim. And you should not send frivolous disputes to the credit bureaus just to see what sticks.
Can Credit Repair Companies Hurt Your Credit?
No, credit repair companies cannot hurt your credit. They can only attempt to remove harmful items from your reports that are weighing your scores down. If successful, your credit scores will improve, not get worse.
Is It Worth Paying Someone to Fix Your Credit?
It may be worth paying for credit repair if you don’t have the time or inclination to do it yourself.
Good credit repair companies have honed their procedures for optimal results. They understand how, why, and when to file disputes. In other words, they may be more effective than the average DIYer.
Credit Report Issues That Credit Repair Companies Can Help Consumers Correct: |
---|
Incorrect Account Balances |
Incorrect Derogatory Information |
Outdated Negative Information |
Accounts Assigned to the Wrong Consumer |
Inaccurate Personal Information |
Unverifiable Accounts |
With costs as high as $150 per month, credit repair companies aren’t cheap. But many come with a money-back guarantee, and you can cancel your subscription anytime.
One of the most affordable credit repair companies is CreditFirm.net, with services as low as $50 per month and no initial work fees or other upfront costs.
You should also consider the services credit repair companies offer beyond filing disputes. All credit repair companies mentioned above offer several additional services, even at the cheapest service levels.
Avoid Scams By Choosing a Legitimate Credit Repair Company
In the best circumstances, credit repair companies can remove inaccurate and unverifiable information from your credit reports to help you achieve a higher credit score.
But even the best credit repair agency cannot say it removes accurate information, lest it run afoul of the Credit Repair Organizations Act.
If you’re interested in subscribing to a credit repair package, vet the organization first. While many legitimate credit repair companies exist, it’s unfortunately true that a few of them are looking to rip you off. A new credit repair scam appears every few months, so don’t let down your guard.