What You Should Know About Credit Repair Companies

What is credit repair?

Credit repair is the process of improving your credit by having inaccurate and negative items removed from your credit reports. This process is important for consumers with low credit scores because a higher score can unlock greater access to credit, lower interest rates and better loan terms.

Additionally, credit scores may affect other areas of your life, including your ability to rent property, your insurance premiums and your eligibility for certain jobs. For many of these consumers, correcting the errors may have made the difference between getting their applications for credit products approved or rejected.

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How credit repair companies work

Credit repair companies are for-profit enterprises that focus on getting incorrect and negative items removed from your credit reports. They shouldn’t be confused with credit counseling agencies, which are typically nonprofit entities that offer financial counseling and education to help you avoid future credit mistakes.

While every credit repair company's process is a little different, the steps that each one takes will probably look something like this:

1. Obtain copies of your credit reports: The credit repair company requests a copy of your credit report from the three major credit bureaus.
2. Review credit reports: It reviews your credit reports for incorrect and negative items that are hurting your credit score. These derogatory marks may include charge-offs, collections, bankruptcies, settled accounts and late payments.
3. Dispute errors: The company sends letters to the bureaus and your creditors asking to validate debts and disputing erroneous information. It'll also send cease-and-desist letters to debt collectors. The credit bureaus have up to 45 days to investigate a dispute.
4. Suggest ways to improve your score: A credit repair company may also advise you to open new credit accounts, which, if used responsibly, can add positive behaviors to your credit report. Alternatively, you can ask a friend or family member to add you as an authorized user on their account.

Are credit repair companies legitimate?

In the credit repair industry, many credit repair companies operate legitimately, but scams are unfortunately common in this space. It is crucial to be vigilant and cautious about the company you choose. As the old saying goes, "If it sounds too good to be true, it probably is." Credit repair companies that overpromise tend to underdeliver and leave consumers disappointed after they’ve paid substantial fees.

You should also be wary of data privacy and authorization risks when hiring a third-party company. Credit repair companies may request your Social Security number, government identification, credit reports and other personal information. Before you give away any sensitive information, ask about the company’s data retention and deletion policy, confirmation of what they will or won’t do with your data and breach notification procedures. Also, you should only provide sensitive information to them through a secure portal or an encrypted file upload.

What to know about your credit repair contract

The Credit Repair Organizations Act (CROA) outlines several requirements that credit repair companies must include in their contracts. For starters, all contracts must be in writing, dated and signed by the consumer. When reviewing a credit repair contract, be sure to note the following items:

• Total cost you’ll owe the credit repair company
• An estimated timeframe
• A full description of the services that the credit repair company will provide
• Your cancellation rights
• Guarantees of performance
• The credit repair company’s name and business address

How to verify a credit repair company

While some credit repair companies are scams, there are many legitimate organizations, too. Before signing up for a credit repair service, do your homework to find a good one. Here are a few ways to verify a credit repair company is legit. 

• Read reviews on sites like ConsumerAffairs and the Better Business Bureau to understand how past customers felt about working with a credit repair company and identify and complaint patterns. 
• Check the company’s complaint records with the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC).
• Confirm the company's contact information.
• Look for a contract that has no upfront fees, clear total cost information, defined services and a three-day right to cancel policy.

In addition to positive customer reviews and minimal filed complaints, indicators of a legitimate credit repair company include several years in business and contact information that is easy to find on the website.

Red flags you should watch for

Some of the most common scams used by disreputable credit repair companies involve the following tactics:

• Pressuring you to pay in advance: Scammers might request an upfront payment, then disappear without providing services. The Credit Repair Organizations Act prohibits credit repair companies from requesting upfront payments. You must sign a contract in writing with the company before it can charge any fees.
• Promising to remove negative information from credit reports: While credit repair companies can dispute negative information on your credit report, nobody can guarantee that it will be removed.
• Not explaining your rights: Under the Fair Credit Reporting Act, you have the legal right to independently dispute inaccurate credit report information for free. Additionally, you can cancel your contract with a credit repair company for any reason at no charge within three business days.
• Telling you not to contact credit reporting agencies: If a credit repair company tells you to avoid personally contacting credit reporting agencies, it’s probably trying to keep you in the dark about what it’s doing, which is a sign of a scam.
• Disputing accurate information on your credit report: It’s unethical to dispute information that you know is accurate. Unscrupulous credit repair companies may dispute negative but accurate information on a credit report and hope that the creditor or credit bureau won't respond within the required 30-day window.

Josh Richner, marketing director for National Legal Center, a consumer rights law firm in Candia, New Hampshire, cautioned that "disputing accurate accounts is asking for trouble. Legitimate credit repair companies know the difference and won't attempt to challenge valid debts. The bottom line is that credit repair companies may be legitimate, but it's important to make sure you're working with a reputable one."

We recommend taking the time to do your due diligence before choosing a credit repair company to help you avoid any scams.

How much does credit repair cost?

Credit repair fees vary widely, and understanding a company’s fee structure is essential before signing a contract. Under the federal CROA, credit repair companies cannot charge you before delivering the services outlined in your contract. Generally, credit repair companies follow one of three pricing models: a one-time flat fee, a fee for each derogatory mark successfully removed from a credit report or a monthly fee. Additionally, some companies may charge setup fees or a fee to access your credit report.

Fees for removing derogatory marks may start at around $35 each. Flat fees might be around $400. For ongoing contracts, fees typically range from about $60 to $150 per month.

The "right" choice among these pricing models depends on your situation. If you only have a couple of derogatory marks on your credit report, it makes sense to pay per item removed. Those with numerous negative marks may be better off with a flat fee or a monthly subscription.

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You can do credit repair yourself

Many consumers hire a credit repair company to dispute items on their credit reports. However, it’s entirely possible to get the job done yourself without paying any fees. It’ll just be a lot more work on your part.

Under federal law, a consumer can request one complimentary copy of their credit report per week from each of the three major credit bureaus — Equifax, Experian and TransUnion — at AnnualCreditReport.com. Additionally, if a lender denies you credit, you can request another copy of your credit report from the bureau the lender used to make the decision.

Here are some steps you can take to start repairing your credit without hiring a credit repair company:

• Get copies of your credit reports. You’ll need to obtain copies of credit reports from each of the three major credit bureaus to identify errors and negative marks affecting your credit.
• Dispute errors. If there are any errors, dispute them with the credit bureaus. To expedite the process, you can dispute the items online through the three major credit bureaus’ websites.
• Pay down revolving balances. Credit utilization is 30% of your FICO score. Paying down your credit cards and line of credit balances can improve your score.
• Consolidate credit card debt. Consolidating high-interest debt from credit cards and other revolving sources can lower your utilization. Additionally, it can put you on a more defined path toward paying off your debt.
• Make all your payments on time. Payment history accounts for 35% of your credit score, which makes on-time payments critical. Consider setting up automatic payments for your credit accounts to avoid late payments.
• Limit your credit inquiries. Only apply for credit when absolutely necessary. While each hard credit inquiry may only drop your score by five points or less, those dings can add up to significantly reduce your score.

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Should you use a credit repair service?

If you have a credit score that needs improvement, using a credit repair service can be a good option. Look for a legitimate company that:

• Provides transparent pricing
• Doesn’t guarantee certain results
• Doesn’t encourage you to make false claims about negative marks

A legit company can make it easier to dispute incorrect information by saving you the time and hassle of doing it yourself. It may also follow up to ensure the bureau removed the inaccurate mark and may offer financial education resources to help you avoid these issues in the future.

However, depending on the number or types of errors on your credit report and the amount of room you have in your budget, you might be better off trying to repair your credit on your own. Repairing your credit independently may take longer since you’ll have to invest your own time and energy into it. But at least you can rest assured that you won’t get scammed, and you may ultimately achieve the same results that you would have if you had paid a credit repair company.

» MORE: How to negotiate credit card debt

FAQ

Bottom line

A strong credit score is key to getting approved for loans and obtaining the best credit terms available. Credit repair companies can help you improve your credit score, but you have to be cautious of scams. Companies may ask for upfront payments in violation of the Credit Repair Organizations Act.

Depending on your schedule and financial resources, you may be better off pursuing credit repair independently or working with a nonprofit credit counseling agency or debt management company.