Approximately one in five Americans has an error on at least one of their credit reports, according to the Federal Trade Commission. Credit repair companies can contact credit bureaus on your behalf and work to remove erroneous information from your credit report. However, the industry is rife with scams, and your time and money may be better spent improving your credit score yourself.
Credit repair involves cleaning up any negative marks on your credit report that may have slipped through the cracks, such as errors and delinquent accounts. You can do it yourself, or you can hire a credit repair agency to remove incorrect or duplicate listings on your credit report.
Credit repair agencies are experts at credit legislation and spotting these erroneous listings — holding credit bureaus, banks, debt collectors and lenders accountable for reporting accurate information.
However, while many credit repair agencies are legit, watch out for predatory practices. If a company claims you can’t improve your score by yourself or guarantees it will increase your score, these are signs of a predatory credit repair company. When considering hiring any company, do your due diligence and scope out reviews online, such as the Better Business Bureau.
The process of credit repair varies by company, so ask about the specific agency’s process before you apply. Generally, you’re offered a complimentary initial consultation, after which you or the agency will:
The Credit Repair Organizations Act (CROA) is a statute signed into law by President Clinton in 1996 to prevent credit repair agencies from engaging in unfair business practices that could result in consumer hardship. A major area covered by CROA is how these agencies are paid.
Under CROA, a credit repair agency can’t demand upfront or “setup” fees before accepting your case. Like for other services, you pay only after services are rendered. Credit repair organizations can either charge you a monthly fee for their services or after each negative listing or item is successfully deleted from your credit report.
If you suspect that a credit repair agency is operating in violation of the CROA, file a complaint with the Federal Trade Commission (FTC).
Your credit report is a detailed record of your borrowing history — credit cards, bank accounts, mortgages, other loans and more. It lists applications you’ve made for all forms of credit (approved or not), your repayment history, details of any defaults or bankruptcies you may have, your current debt, information on the accounts you currently hold and any court judgments against you
Lenders and other providers use this information to assess the risks of giving credit to someone.
With so many credit repair agencies in the US, consider the following factors when weighing whether an agency is reputable.
Note that, unlike other agencies, states don’t require these companies to have a “credit repair license.” Empower your decision with deep research into an agency’s history, service and reputation before signing a contract.
If you’re ready to get started improving your credit score, here’s the process to repair your credit.
Get a copy of your credit report — it’ll show you the negative items that led to your poor credit score. By federal law, you’re allowed to get a free copy of your credit report from the major credit bureaus every 12 months.
When you receive your reports, look for three things in particular: inaccurate information, past-due accounts and maxed-out accounts.
If you find information that’s incomplete or inaccurate, have it removed or changed. On your credit report, you’ll find instructions for disputing errors. You may submit disputes online or through phone or mail.
According to many experts, mail is the best way to submit your dispute. For one, you can include more hard evidence that supports your case.
Note that submitting a dispute online can tie your hands: If you agree to the terms of an online form, you may waive your right to sue a credit bureau if you’re unhappy with how it’s investigating your complaint.
Keep these tips in mind while submitting your disputes:
While being in debt doesn’t necessarily hurt your credit, late and missed payments most certainly will. Focus on past-due accounts that are delinquent for fewer than 180 days. Contact your creditor to explain that you want to get current on your account. They may be willing to work with you to make repayment easier — for example, by letting you repay over time instead of all at once.
Next, pay off accounts that have been charged off — these are payments more than 180 days late. If your creditor sold your debt, you’ll make payments to a third-party debt collection agency.
Paying a charged-off account probably won’t improve your credit score much. But if your credit history shows you haven’t paid your debts, lenders will be wary about extending new credit to you.
Credit utilization ratio is how much of your total credit you’re using. Say you have two credit cards, each with a $500 balance and a $1,000 credit limit. This means you have $1,000 in total balances and $2,000 in total credit. Your credit utilization ratio is $1,000/$2,000 — or 50%.
To increase your credit score, pay off your credit card balances. Most experts recommend keeping your credit utilization ratio under 30% for each credit card.
Erasing damage to your credit score can feel like digging yourself out of a deep hole — it’s tough but doable. After you’ve made significant progress, find new ways to build your credit.
One of the best ways to add new credit is to get a credit card. Since you have bad credit, focus on secured cards and store cards — and, if necessary, subprime cards. Also, consider becoming an authorized user on someone else’s account or applying for loans.
Scams often target financially distressed individuals, and the credit repair industry is no exception. The FTC warns that many credit repair scams promise to remove negative information even if it is accurate, such as bankruptcies.
In 2010, the FTC amended its Telemarketing Sales Rule to help reduce the number of scams by prohibiting credit repair companies from charging any fees up front and only collecting payment once inaccurate information has been removed from your credit report.
Hiring a credit repair company can be expensive, and some argue it’s a service you could do yourself. Plus, credit repair can only remove inaccurate information. Depending on your situation, your credit report may benefit more from paying off debt or delinquencies instead.
Before hiring a credit repair company, carefully consider if you could improve your credit through other methods.
From auto loans and mortgages to reporting services, you can boost your score without plastic.
Improve your chances of getting credit from lenders by updating and correcting your credit report. Find out how to understand your report and all of the information it contains.