Credit Repair: How It Works, How to Vet Companies and Do It Yourself
May 31, 2019 | By ValuePenguin
If you’ve been searching for ways to improve your credit score, you might have come across credit repair companies, which can help you fix errors on your credit reports. Although these companies can help consumers, there are several things you should be aware of before partnering with one, as the credit repair industry is known for being filled with scams.
Below, you’ll find a detailed look at what you need to know about credit repair companies, from how to vet one to red flags you should be on the lookout for.
What is credit repair?
Credit repair is the act of getting inaccurate or outdated information removed from your credit reports with the intention of improving your credit score. In the world of credit reporting, errors are quite common. A 2013 Federal Trade Commission (FTC) study found that 5% of consumers had an error on one of their three credit reports — that translates to one in every 20 people.
According to the Consumer Financial Protection Bureau (CFPB), common credit reporting errors include:
- Accounts on your report that belong to someone with a similar name
- Incorrect information due to identity theft
- Accounts that are mistakenly reported as delinquent
- Accounts with the wrong balance amount
It’s important to check your reports with the three major credit reporting agencies (Experian, Equifax and TransUnion) each year for errors. This can be done for free once per year using AnnualCreditReport.com, which is run by the three major credit bureaus.
How credit repair companies come into play
Credit repair companies come into play when you don’t want to search for and correct potential errors on your own. Some people may consult a credit repair company either to save time or because they have significant errors due to something like identity theft.
“Credit repair companies work on your behalf to remove legitimate inaccuracies from your credit report,” said Katie Ross, Education, Development & Housing Manager at American Consumer Credit Counseling.
The key word here is inaccuracies. It’s important to keep in mind that credit repair companies will only be able to remove negative information that is inaccurate. Credit repair companies cannot remove any information that is negative but also accurate.
You can expect to pay anywhere from $50 to $300 in monthly fees, as well as a potential initial fee and credit report fee, Ross noted. The cost varies among companies, but you should make sure the amount feels reasonable.
Vetting credit repair companies
Many consumers are drawn to credit repair companies because of the bold claims they make, including the potential to dispute valid information or boost one’s credit score exponentially. But in reality, many of these claims are unfounded and come from companies that are engaging in fraudulent behavior.
“I think that might be a reason that somebody might go to one of these agencies — because they’re sort of lured by the promises,” said Kathryn Bossler, a credit counselor with GreenPath, a nationwide consumer credit counseling agency. “But in actuality, if it’s true information, it’s going to remain on your credit report even after that dispute. I think somebody might get lured in by the promises.”
Although there are many legitimate companies out there, there are also many fraudulent companies masquerading as legitimate ones. Because of this, it’s important to vet credit repair companies carefully.
Ross suggested that one of the first steps consumers should take is researching a company’s reputation on the Better Business Bureau (BBB) website. Look for the company's BBB rating, and take a look at some of the customer reviews. You can also look up a credit repair company’s reputation on the National Association of Credit Services Organizations (NASCO).
Once you’ve looked up the company's reputation on these websites, it’s important to be on the lookout for warning signs that you’re dealing with a scam.
7 red flags of a credit repair scam
Whether you already partnered with a credit repair company or you’re looking to work with one soon, here are seven red flags to be on the lookout for:
- Potential results that seem too good to be true. If something seems too good to be true, Bossler said, it probably is. “If you know the information that is negatively impacting your score is accurate, and they’re saying that they’re going to be able to fix that, that would for sure be a sign that it could be a scam,” she said.
- Promising you a new identity. If you ever come across a company promising you a new credit identity, run for the hills. “There are scams out there where they’re offering to get you a new identity,” Bossler said. “If they’re offering you a new social security number or something like that, that’s for sure a sign of a scam.”
- Really quick results. When you file a dispute with one of the three major credit reporting agencies, it will typically take around 30 days to get results whether you’re working by yourself or with a company, Bossler said. “If they’re saying there are going to be immediate results, that would for sure be a scam,” she said.
- Upfront payment before services are provided. A reputable credit repair company should not ask for payment upfront in order to help you. “A legitimate company should be really clear and transparent about the costs that you’ll pay and should not require payment upfront before they actually help you,” Bossler said.
- Not having a contract. Ross said not having a contract is a red flag, as well as having a contract that lacks detail regarding the services the company will be providing. Make sure you have a contract that is thorough and also indicates that you have three days to cancel without being charged, Ross said.
- Asking you not to contact the credit reporting agencies directly. A legitimate company will never ask you not to contact the credit reporting agencies directly, according to Ross — if this happens, you might be dealing with a scam.
- Advising you to give false information when applying for loans. One sign of a scam, according to the FTC, is a credit repair company telling you to share false information on your credit or loan applications.
3 steps to repairing your credit on your own
It’s fairly easy to fix any credit reporting errors on your own. That, combined with the potential for scams, is why Bruce McClary, vice president of communications at the National Foundation for Credit Counseling (NFCC), advises against using credit repair companies.
“I have a fairly straightforward view of credit repair companies,” he said. “There’s nothing that someone else can do on your behalf that you can’t do yourself when it comes to credit repair, and doing it yourself can save you money as well as spare you from the risk of being scammed.”
If you’re looking to repair your credit on your own, here’s how to get started.
- Get free copies of your three credit reports. Bossler said the first thing she recommends is for consumers to get free copies of their credit reports using AnnualCreditReport.com.
“The Fair Credit Reporting Act [mandates] that we all have access to a copy of our credit report for free once per year from each of the three major credit bureaus,” she said.
- Check for any errors. Once you have your credit reports, Bossler said it’s important to look for any errors. You should also check for anything that is past the legal limit for credit reporting. Most negative information can only stay on a credit report for seven years, Bossler said, except in the case of Chapter 7 bankruptcy, which can stay on your credit report for 10 years.
- Dispute any errors. If you notice any errors on your credit reports, you can go back to AnnualCreditReport.com to dispute any inaccurate information. You can also dispute information via letter. Be sure to include any documentation you have supporting the error.
“It’s good to do [this] because mistakes are common,” Bossler said. “It’s good to know what’s on there, especially prior to applying for any kind of loan.”
In addition to disputing incorrect information with the credit bureau, you can call the company that reported the inaccurate information and ask them to update it. For example, if there’s an incorrect late payment for one of your credit card accounts, you can call the card issuer and request they update the information.
One added perk of repairing your credit on your own, Bossler said, is that it forces you to take a good, hard look at your credit. “That’s the other benefit — you can understand what things you might need to work on clearing up by paying off, for example, something in collections.”
Repairing your credit on your own is fairly simple, and is worth considering before partnering with a credit repair company. By partnering with a credit repair company, Bossler noted, you’re primarily paying for convenience.
“It’s a pretty simple process,” she said. “I would just empower [consumers] to do it on their own.”