What you should know about credit repair companies

Having excellent credit unlocks many advantages. Strong credit scores not only increase your approval odds for loans and credit cards; they can also help you get hired for some jobs, receive lower insurance premiums and find a place to live.

The average FICO score in the U.S. was 714 in 2022, according to Experian. If your score is significantly below this average, you might consider hiring a credit repair company. However, before you do, it pays to understand what these companies do, how much it’ll cost to work with one and if you can achieve the same results independently.

Key insights

• A good credit score is essential to getting the best interest rates and terms on credit.
• If you’re considering hiring a credit repair company, watch out for scams that demand upfront payment or encourage other illegal acts.
• It is possible to repair credit on your own without hiring a credit repair company.

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.

A study by the Federal Trade Commission found that 1 in 4 consumers had an error on their credit report that might affect their credit score. Additionally, 1 in 5 had an error corrected after it was disputed. For many of these consumers, correcting the errors may have made the difference between getting their applications for credit products approved or rejected.

» MORE: How to check your credit score

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 that appear helpful are actually a scam. 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.

However, there are legitimate credit repair companies, so don't give up hope. Before signing up for a credit repair service, do your homework to find a good one. Read reviews on sites like ConsumerAffairs to understand how past customers felt about working with a credit repair company.

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.
• 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."

The Credit Repair Organizations Act regulates the credit repair industry. It prohibits credit repair companies from making misleading or untrue statements to consumers. All contracts for services must be in writing, and the company cannot require upfront payments. Additionally, customers can cancel their contracts within three business days without penalty for any reason.

How much does credit repair cost?

Fees to hire a credit repair company vary. 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 or so. 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 year 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.

» MORE: Should I file for bankruptcy?

Should you use a credit repair service?

Using a credit repair service can be a good option if you can find 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 had you paid a credit repair company.

» MORE: How to negotiate credit card debt

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.