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What is credit repair?
Credit repair is a multistep process that focuses on auditing your credit report and disputing errors. You can carry out the credit repair process on your own, or you can work with credit repair companies to streamline your efforts.
No matter which route you take, credit repair is a personalized process based on your unique financial situation. Factors like bankruptcy, military service history and financial hardships may help determine the steps you should take.
How does credit repair work?
The credit repair process is all about looking at your debt, credit accounts and finances and then creating an action plan to help your credit.
Here is a general overview of how the credit repair process works:
- Analyze your credit report: Request and review your credit report to see which items are reducing your score. Credit bureaus like Equifax®, Experian® and TransUnion® are obligated to provide one free credit report each year.
- Challenge errors: If you find errors on your credit report, you can challenge them with the corresponding bureau or company that originally reported them. Successfully resolving credit disputes can drastically help your credit.
- Create a credit repair plan: Once you know which negative items are errors and which are legitimate problems, you can construct an action plan to resolve them. Credit repair companies can help you determine which items you should prioritize first and devise monthly payments.
When is credit repair useful?
Credit repair is useful when your poor credit is preventing you from qualifying for a mortgage, car loan or any other qualifying line of credit. When you have low credit, you’re often hit with higher interest rates and finance charges.
Repairing your credit can help you qualify for a competitive rate while lowering the amount of interest you’ll end up paying over time.
The good news is bad credit doesn’t have to follow you for life. Taking the needed steps to repair your credit and maintain healthy financial habits can help restore your credit.
How long does it take to rebuild credit?
Unfortunately, there’s no way to predict how long credit repair will take, as every credit report is unique. Credit bureaus are required to respond and resolve credit challenges within 30 to 45 days, although it can take them even longer. Though that seems like a short timeline, the average consumer may have multiple errors that need to be challenged, which may extend how long it would take.
If you’re challenging the errors yourself, you’ll need some time to download and review your reports, gather all necessary financial documentation and draft the actual challenge letters. Once those are submitted to the credit bureaus—either by mail or online—the typical 30- to 45-day process will begin.
How much does credit repair cost?
The total cost of credit repair depends on your credit situation and which companies you work with. Credit repair companies can charge anywhere from $50 to $150 each month.
Prices largely depend on how much help you need—someone with only one or two errors on their credit report may likely pay less than someone with multiple errors. A credit repair company’s policies will also influence your rate.
Some companies may charge a one-time flat fee, charge per each derogatory mark or charge a monthly payment.
Credit repair companies cannot charge you for services that have not been delivered. The contract should also outline your right to cancel without penalty—although you may be charged for any unpaid fees due.
Differences between credit repair, debt settlement and credit counseling
There are many different credit services out there, and they aren’t all the same. Understanding the differences between these services and what companies offer can help you choose the service that’s right for you and your credit needs.
- Credit repair: Credit repair companies review credit reports and request correction or removal of marks on your credit reports that were reported in error while often offering additional services as well.
- Debt settlement: Debt settlement is the process of contacting creditors and paying off your debt for lower than the overall amount.
- Credit counseling: Credit counseling services help educate you about credit and financial literacy and can also advise you about other aspects of your financial situation, like making a budget and managing your debt.
What do credit repair companies do?
Credit repair companies and services help you challenge inaccuracies on your reports with credit bureaus, debt collectors and creditors to ensure you have the most accurate credit report. Since some credit situations are more complex than others, credit repair companies can help you resolve credit issues that would otherwise be hard to resolve on your own.
Credit repair companies will start by pulling one or more copies of your credit report from the three major credit bureaus. It’s important for credit repair companies to pull credit reports from all three bureaus because some credit agencies only report to one credit bureau and there may be errors on one report that won’t appear on another.
When reviewing your credit reports, credit repair companies will ask you to identify any errors, such as:
- Inaccurate or duplicate accounts
- Accounts that don’t belong to you
- Inaccurate inquiries
- Missing accounts that should be listed on your reports
- Derogatory marks and delinquencies
- Fraudulent activity
Once you have identified these errors, the credit repair company may ask for extra documentation to help confirm the inaccuracies. With all the necessary information, they’ll file the disputes and work with the credit bureaus to address the issues.
In addition to working to remove inaccuracies, credit repair companies may also help answer questions you have about your credit or provide you with information on how you can achieve a healthy credit profile.
How is my credit score calculated?
Your credit score is calculated using a variety of factors, and these factors depend on the scoring model. The two primary scoring models are FICO® and VantageScore®, but FICO is the more commonly used model when lenders check your score.
Your credit score is a three-digit number that lenders and other companies may use to identify how good or bad you may be with your finances. The major credit bureaus include Experian®, TransUnion® and Equifax®, and they give you a score based on the information in your credit report.
Each factor is weighted differently, so some factors may affect your credit health more or less than others.
FICO scoring factors:
- Payment history: 35 percent
- Credit utilization: 30 percent
- Length of credit history: 15 percent
- Credit mix: 10 percent
- New credit: 10 percent
VantageScore 3.0 factors:
- Payment history: 40 percent
- Depth of credit: 21 percent
- Utilization: 20 percent
- Balances: 11 percent
- Recent credit: 5 percent
- Available credit: 3 percent
The VantageScore model has one additional factor and as you can see, it assigns different weights as well. The factor that affects your score the most for both models is your payment history, which is how well you pay your bills on time. The next major factor is your credit utilization, which is how much you owe compared to your total credit limit.
Additional factors include how often you apply for new credit, the age of your various credit accounts and the different types of credit accounts you have experience with. The additional factor for VantageScore is balances, which is the total amount of recently reported current and delinquent balances.
Does checking my credit hurt my score?
Checking your credit is known as a soft inquiry, and it doesn’t hurt your credit report or score. When you hear people discuss how checking your credit hurts your score, they’re likely talking about when a financial institution or company runs a hard inquiry on your credit report, which happens when you’re applying for a loan or new lines of credit.
When you sign up for credit repair services, they often offer credit monitoring, which will alert you if there are any changes to your score. Not only does this help you catch potential errors or signs of identity theft, but it can help you keep track of your score without harming it.
Is credit repair legal?
Credit repair is completely legal, so long as the company that you work with complies with state and federal laws. For example, the Fair Credit Reporting Act (FCRA) protects consumers, while the Credit Repair Organizations Act (CROA) sets rules for credit repair companies.
What is the Fair Credit Reporting Act?
The Fair Credit Reporting Act (FCRA) plays a major role in the credit repair process, as its laws protect consumers by governing credit bureaus and furnishers like creditors and financial institutions. Some of the key laws and rights granted in the FCRA include:
- Credit bureaus are required to provide one free credit report every 12 months.
- Credit bureaus are required to verify the accuracy of the information listed on the report.
- Creditors and financial institutions are required to only report complete and accurate consumer information.
- Consumers can challenge incorrect and incomplete items listed on a credit report.
- Consumers can seek damages from credit bureaus and furnishers violating FCRA.
- Consumers can limit who can access their credit reports.
- Consumers can inquire if their credit report is being used against them financially.
What is the Credit Repair Organizations Act?
The Credit Repair Organizations Act is a set of legal guidelines that credit repair companies must follow when working with their customers.
Some of the guidelines include:
- Credit repair companies cannot ask for advance payments.
- Credit repair companies must provide written contracts.
- Customers have the right to cancel their contracts.
The CROA helps regulate the industry and protects consumers from illegal credit repair scams. Under the CROA, credit repair companies are not allowed to guarantee the removal of negative items, cannot offer to create a new credit profile for you and cannot accept payment until after some services have been completed.
How to know if a credit repair company is legitimate
While there are many
credit repair companies, the industry is also filled with its fair share of scammers. Doing thorough research on the companies you’re looking to work with can save you time and money. To verify a credit repair company’s legitimacy, you’ll need to know what they’re legally allowed to do and not do.
When distinguishing good credit repair companies from bad ones, look out for the following
red flags:
- They’re unable to answer your questions. Legitimate companies will provide answers to any and all questions that may arise.
- They ask you to lie about your credit history. Under the CROA, companies are prohibited from asking you to lie or misrepresent your information.
- They fail to provide information. Reputable companies will always inform you of your rights as a consumer.
Legitimate credit repair companies will be up front about how they can assist you and what services they think will work in your favor. They’re here to help you understand your credit standing and want to work with you to improve your credit.
How to fix your credit on your own
There are many different
DIY credit repair methods that can help you improve your standing on your own. The best place to start is getting copies of your credit report from each of the major credit bureaus to see if they’re accurate. If you spot any errors, you may want to contact the bureaus to try and address the negative mark.
If you don’t have errors on your report, the following methods are good credit practices to begin improving your credit:
- Make timely payments: Strive to make regular, on-time payments on time, even if you can only meet the minimum payment due.
- Reduce credit utilization: Credit utilization compares your account balances to your total credit limit. Try to keep your credit utilization below 30 to 10 percent of your credit limit.
- Limit applications: Each time you apply for credit, a hard inquiry triggers that briefly lowers your score. Don’t apply for too many new credit cards in a short time.
- Consolidate debt: Debt consolidation can reduce your total monthly payments by merging all of your debt into one loan. This method can save money if your consolidation loan has low interest.
- Maintain accounts: Because credit history makes up 15 percent of your score, it’s important to keep your oldest accounts open and in good standing.
What hurts your credit?
Negative marks, also known as derogatory marks, are items on your credit report that negatively affect your credit health. A negative mark can stay on your report for seven to 10 years depending on what kind of mark it is.
There are different types of negative items, but one of the most common is a late payment. When you don’t pay certain bills on time, it will show up on your credit report. This often happens with credit cards or loan payments for a vehicle or home. You might try checking your credit card and loan agreements to see if they offer a grace period, which gives you a buffer period just in case you’re going to be late with a payment.
Additional negative marks include other potential signs of financial distress, such as collection accounts, bankruptcy and multiple applications for loans or new lines of credit.
How long does negative information stay on my credit reports?
As we mentioned, the length of time that negative information stays on your credit report varies based on the type of negative mark. For example, collection accounts and Chapter 13 bankruptcy stay on your credit report for up to seven years, but Chapter 7 bankruptcy can stay for up to 10 years. Typically, most negative marks can stay on your credit report for up to seven years.
There are ways to potentially have certain negative marks removed sooner, such as sending a pay for delete letter to your creditor.
How to maintain good credit after it’s repaired
The best way to maintain good credit after it’s repaired is to develop good financial practices. For example:
- Don’t acquire too much debt.
- Make your payments on time.
- Check your credit score and report regularly.
- Find extra sources of income rather than accumulating debt.
- Create a budget.
Are credit repair services right for you?
Depending on the status of your credit report, credit repair might be the best next step to improving your credit. If your bad credit is holding you back from achieving your goals in life, credit repair is for you.
Remember, bad credit does not have to follow you. Working with a credit repair company or working to challenge negative items on your own can help clean up your credit report and give you better financial standing. Beyond credit repair, maintaining healthy credit habits will set you up for a successful financial future.
Credit repair services are designed to help those who are most in need of negative item removals from their report. Follow the steps in this guide if you’re ready to improve your credit and reach your credit goals.