Dealing with a poor credit score or negative marks on your credit report can be both financially and emotionally harmful. And if you’re in that situation, you probably find yourself looking for solutions. Credit repair companies market themselves to those with poor credit as a way to improve your credit.
There’s a lot to know about these companies before you agree to work with one. There are plenty of legitimate companies, but there are scams to look out for as well. And so this article, we'll be sharing the key things you need to keep in mind.
What is a credit repair company?
A credit repair company is a third-party organization that works to improve consumers’ credit reports and scores for a fee. Credit repair companies market their services to those with poor credit scores or with negative marks on their credit reports.
These companies are often for-profit businesses, though there are also non-profit organizations that help people with credit repair. Credit repair companies are regulated by the Credit Repair Organizations Act (CROA), passed by Congress in 1996. Unfortunately, the credit repair industry is also filled with scams. As a result, it’s important to do your research before hiring a credit repair company.
How do credit repair companies work?
Credit report companies help consumers to improve their credit scores and creditworthiness by removing negative marks from their credit reports. They typically do this with a four-step credit repair process.
Step 1: Analyze your credit report
The first thing a credit repair company does when you hire them is to analyze your credit report. They’ll look for anything on the report that could be damaging your credit score. Then they’ll consult you to figure out what’s accurate and what’s not.
Step 2: Dispute errors
One of the biggest jobs of credit repair companies is to help consumers dispute errors on their credit reports. According to a study by the Federal Trade Commission, about 20% of people have at least one error on their credit reports.
Common errors include an account belonging to another person, an account mistakenly marked as open or closed, an incorrect balance, or an error due to identity theft. Credit repair companies dispute these errors with the three credit bureaus — Equifax, Experian, and TransUnion — to have them removed from your credit report.
Step 3: Negotiate with creditors
In addition to disputing erroneous negative marks, a credit repair company can help you to address legitimate negative marks. They might contact creditors on your behalf to negotiate having a collections account resolved at a discounted rate.
Step 4: Recommend next steps
After a credit repair company has taken the steps of addressing the negative marks on your credit report, it may also make recommendations to further improve your credit. For example, a credit repair company may recommend that you apply for a new credit account to add more positive marks and increase your total credit available.
How much does credit repair cost?
Credit repair companies typically charge in one of three different ways. First, they might charge a one-time, flat fee for their services. They could also charge for each derogatory mark they remove. Finally, companies may charge a monthly fee. According to Experian, credit repair subscriptions typically charge between $50 and $100 per month.
Are credit repair companies legit?
Credit repair is a legitimate service, and there are plenty of legally-operated credit repair companies out there. Unfortunately, there are plenty of fraudulent credit repair companies who scam customers and make promises they can’t keep.
As a result, the Federal Trade Commission regulates these companies under federal law. Signs of a legitimate credit repair company include:
A company that only charges for services after they’re provided
Those companies that charge a flat-rate fee shouldn’t charge you until after they’ve performed the service. For those that charge a monthly subscription fee, the fee should always cover the previous month, not the upcoming month.
A company that informs you of your legal right to repair your credit yourself
Federal law requires that these companies inform you that everything they do to help you, you could do it yourself.
A company that doesn’t promise to delete accurate information
It is illegal for credit repair companies to advise that you make false statements to credit reporting agencies. It’s also illegal for these companies to promise to remove anything — the best they can do is try. They can’t guarantee results. If a company makes promises, it’s not a legitimate company.
A company that provides a written contract
A legitimate credit repair company should provide a written contract, so you know exactly the nature of the relationship and your legal rights during the process.
How to avoid credit repair scams
While there are plenty of companies out there who legitimately help people repair their credit and who comply with federal law, that’s not the case for all of them. Unfortunately, many credit repair scams exist. There’s a saying that says that anything that seems too good to be true probably is. That saying is certainly accurate when it comes to credit repair.
Avoid companies who say you can't repair your credit yourself
First, avoid companies who tell you they can do something you can’t do yourself. Individuals can dispute errors on their credit reports and negotiate with creditors. You don’t technically need a company to do it on your behalf.
Many consumers believe that hiring a credit repair company is necessary to remove negative marks from their credit reports. Unfortunately, a credit repair company can’t help you to remove legitimate negative marks.
Avoid companies that promise you a new credit identity
Next, avoid companies that promise to provide you with a new credit identity. Some companies make this promise and then illegally sell you a new Social Security number. A company that makes a promise like this one is a huge red flag. And according to the Federal Trade Commission, this type of deal could result in prison time for you.
Do your research and read reviews
Finally, make sure to read online reviews of companies before you hire them. The Better Business Bureau reports customer complaints, and many other companies publish company reviews. You can even speak with people you know to find out if anyone has a legitimate company they recommend.
Finding a company through word of mouth reduces your chances of impulsively signing up with a company because it sounds like a great opportunity.
The best credit repair companies that are not for profit
One of the best ways to safely work with a credit repair organization is to seek out a non-profit organization. Here are a few to consider if you need help:
Operation HOPE is a non-profit organization founded in 1992 with the mission of disrupting poverty and financially empowering underserved communities. Among other things, Operation HOPE works with people through both workshops and one-on-one counseling to clear errors on their credit scores. The organization has found that 72% of the people it works with see an increase in their credit score.
National Foundation for Credit Counselling (NFCC)
The National Foundation for Credit Counseling is a non-profit organization that provides a variety of financial services, including debt management plans, loan counseling, credit report reviews, and bankruptcy counseling, among other things.
Credit.org is a non-profit financial counseling agency. The organization was formed in 1974 to help improve the financial wellbeing of individuals and families. The organization began offering free credit counseling services as a partner organization of the National Foundation for Credit Counselling.
InCharge Debt Solutions is a non-profit credit counseling organization and member of the National Foundation for Credit Counseling. The organization offers free credit counseling to help identify steps they can take to repair their credit, as well as improve their overall understanding of their finances.
Alternatives to credit repair companies
Hiring a credit repair company can be a stressful ordeal. The idea of having negative marks removed from your credit report sounds great, but you also worry about getting wrapped up in a scam. The good news is that there are alternatives to working with a credit repair company. Here's how to work on improving your credit on your own:
Dispute errors on your credit report
Federal law requires that everyone be able to pull their full credit report for free at least once per year. And during the COVID19 pandemic, people can view their full credit report weekly. You can do so at AnnualCreditReport.com. Be sure to check your report for errors. If you find any, you can contact the credit bureaus and dispute them.
Negotiate bills in collections
When you check your credit report, you can also look for legitimate negative marks that may be hurting your score, including bills in collections. Once you have a list in front of you, you can try to settle with the company to have the bill marked as paid if you pay it right away.
Take steps to boost your credit score
There are plenty of other steps you can take to boost your credit score, in addition to addressing the negative marks. Each month, your creditors your on-time payments to the credit bureaus.
Therefore, the longer you continue to pay your bills on time, the better it is for your credit. You can also improve your credit score by reducing your credit utilization (aka the percentage of your available credit you’re currently using). You can do this by paying down debt.
The bottom line
Credit repair is a legitimate industry, and there are plenty of legally-operated companies that offer these services. However, there are also plenty of scams you need to watch out for.
A better route might simply be taking steps to repair your credit on your own. Ready to get started? Be sure to check out our completely free course on how to Build Good Credit!