What is credit repair? The term “credit repair” itself sounds nice and helpful, but has been hijacked by more than a few less-than-reputable companies. However, that doesn’t mean the idea of repairing your credit isn’t an important one — or that you have to submit yourself to a potential scam to get help. Here’s what you really need to know about credit repair, and how to build good credit that will last.
What Is Credit Repair?
There’s no uniform definition for the term “credit repair,” which is part of the problem with the concept as a whole. Put literally, credit repair is the act of improving your credit, often by taking steps to rectify any inaccurate negative items on your credit report.
It doesn’t matter if you’re doing this yourself or if you’re paying another company to do it for you — working to improve your credit is credit repair.
Now, let’s talk about how companies sell this service.
How Credit Repair Companies Work
There are so many types of companies out there that promise to help you with your finances that it can be hard to tell one from another. What makes credit repair companies different from others is their focus on correcting specific errors in your credit reports. Credit counselors, on the other hand, work with you to establish healthy financial habits while helping you create a plan to get out of debt.
But what defines a credit repair company? According to the Credit Repair Organizations Act, a “credit repair organization” is one that, with certain qualifications and exceptions, offers or provides services intended to “improv[e] any consumer’s credit record, credit history, or credit rating,” or provides advice or assistance regarding such matters, in return for payment.
In real life, that often looks like services that charge a fee for helping you dispute items on your credit report (they are generally prohibited from charging a fee in advance). Credit repair companies typically write letters on your behalf to credit bureaus in which they assert that information on those reports is inaccurate. You’re essentially paying them to manage the communication.
Short of helping you resolve errors on your credit report, there’s not much else credit repair companies can do to improve your credit. In fact, some credit repair companies who promised more landed themselves in hot water for doing so. Read below to see what to look for to help spot a credit repair scam.
How to Spot a Credit Repair Scam
Credit repair companies come in many shapes and sizes, and there have been instances in the past of fraud by some credit repair companies. For example, some have charged money for false promises — and, according to the Federal Trade Commission (FTC), some even illegally sell social security numbers so customers can try to establish new credit.
These false promises can range from a guarantee to fix your credit within a certain time frame to removing correct but negative information from your credit reports in order to improve your credit scores. Some even go so far as to indicate specific credit scores they can get you to.
Guarantees or actions like this are often the first sign of a scam. To help consumers protect themselves from such companies, the Credit Repair Organizations Act “bars companies offering credit repair services from demanding advance payment, requires that credit repair contracts be in writing, and gives consumers certain contract cancellation rights.”
Besides the rules mandated above, it helps to also look out for red flags, such as these outlined by the FTC:
- They demand an advance payment (which, as noted above, is generally prohibited) and/or they don’t explain your rights in working with them
- They try to get you to not contact credit reporting agencies (CRAs) on your own
- They try to convince you to dispute accurate information on your credit reports; they might also try to convince you to lie on credit applications
In short, a disreputable credit repair company might try to take your money to do things that are illegal to attempt to improve your credit, and they might also try to make it so that you can’t see how you can fix your credit mistakes on your own.
DIY Credit Repair
And therein lies the rub. The truth about credit repair is that you can do it on your own. Sure, you won’t get a perfect credit score overnight (which is a fruitless aim as we all have multiple credit scores anyway), and you might have to live with some of the things dragging down your credit longer than you’d like.
But the truth is, negative credit histories can’t be erased overnight by you or anyone else, not even if you pay them. Here’s the good news:
You can do credit repair on your own. And small steps can help you see improvement even before you put the most difficult parts of your credit history behind you.
First Steps to Take to Repair Your Credit
Here’s what you can do right now to DIY your credit repair:
- Obtain your credit reports at AnnualCreditReport.com from all three CRAs and make sure all the information on the reports is accurate.
- Immediately dispute any inaccurate or incorrect information on your credit reports with the CRA showing the credit report error. You can dispute your credit reports for free using the tips outlined here.
- Sign up for free tools to help you monitor your progress on your credit, such as Upturn.com and other sites that help you see one of your credit scores for free so you can see a baseline from which you’re working.
FREE TOOL: Are mistakes on your credit report hurting your credit score? Find out here.
Next Steps to Take to Repair and Improve Your Credit
Once you know your credit report is a fair and accurate representation of your credit history, then you can start taking steps to improve your credit, such as:
- Managing any accounts you have in collections so you can make sure they don’t live on your credit report as negative items longer than necessary. That means contacting the collections agencies and working to negotiate a payment plan or settle the debt (and be sure to get any agreement you make with them in writing).
- Working to consolidate or pay down your credit card debt, as high credit card balances can drastically hurt your credit scores. (The ideal ratio is to keep your credit card balances at 30 percent of your credit limits or lower; the lower the better).
- Making sure you pay all of your bills on time from here on out, as payment history is the largest factor of your credit scores.
- Avoiding applications for new credit unless you absolutely need it — and rate shopping when you do so that your credit doesn’t take more of a hit than it needs to.
- Keeping old credit accounts open, as credit history is a factor in your credit score and an easy one to maintain. This also keeps your available credit higher relative to the amount of credit you are actually using, which is also important. Although it might seem like it’s a good idea to purge old accounts, any positive credit history you have can help improve your scores.
Slow and Steady Wins the Credit Repair Race
It can be a scary position to be in to know you need help and to not be sure where to get it. The good news is, the best way to win the credit repair race is through consistent actions taken to rectify whatever’s bringing your credit down. Even better, this is something you can do starting right now without paying a large fee to someone else.
It takes time to build good credit, and it takes time to improve bad credit. But doing the work of improving your credit can help you establish a foundation of positive habits that, when maintained, can help you for years to come. In this case, slow and steady really does win the race.