Allison Martin
·6 min read
Key takeaways
Credit repair is a term used to describe the process of restoring your credit rating.
You can hire a credit repair company to do the legwork for you or repair your credit on your own.
Credit counseling may also be a viable option to repair your credit.
If your credit score is on the lower end, you may be looking for ways to improve it. The most common strategy is credit repair. It involves addressing errors and outdated information with the main three credit bureaus.
How credit repair works
There are three primary ways to repair your credit. You can hire a company to file disputes with the credit bureaus on your behalf. There’s also the option to file disputes on your own. Or you can work with a credit counselor to receive more detailed guidance on ways to improve your credit.
Credit repair companies
Credit repair companies handle the process for you in exchange for a fee. The company starts by getting copies of your credit reports from the major credit bureaus. Next, the company identifies negative entries that could be dragging your score down.
If any of these items are reported in error or are past the reporting timeline, the credit repair company will file disputes with the credit bureaus on your behalf. The credit reporting agencies have 30 days to respond to the dispute, or the items in question must be removed.
In some instances, credit repair companies work directly with creditors, lenders and other information furnishers to have accurate and timely items removed in exchange for payment or as a gesture of goodwill. Or the company will advise you on best practices to deal with negative items on your credit report and soften the impact.
What to watch out for
Unfortunately, the credit repair industry isn’t without dishonest operators. The Consumer Financial Protection Bureau (CFPB) identifies the following as red flags to be aware of.
Demands upfront payment. It’s illegal for credit repair companies to request payment before services are rendered.
Guarantees negative removals. If the disputed information is accurate and timely, it can’t legally be removed by a credit repair company.
Discourages contact with credit bureaus. Shady credit repair companies suggest that you avoid contact with credit reporting agencies during the dispute process.
Fails to disclose your rights. Credit repair companies must explain the rights you have as a client and that you can handle the dispute process on your own.
Refuses timely cancellation requests. You have up to three days to cancel your contract without incurring fees.
When to use a credit repair company
You have the power to handle the credit repair process on your own. But if you’re strapped for time or would prefer to let a reputable company do the work for you, hiring a credit repair company could be worthwhile. Or you can explore credit counseling as it may be a better fit.
Credit counseling
Credit counselors provide guidance on ways to better manage your household’s finances. They review your spending plan, debt load and credit reports and communicate the most effective ways to work towards improving your personal finances.
Services are offered by nonprofit credit counseling agencies, often free of charge. The first meeting with a financial counselor is where you’ll share details regarding your finances so the counselor can tailor a suggested action plan.
In some instances, the counselor may also suggest a debt management plan (DMP) to help you get a handle on your outstanding debt balances. If you sign up for a DMP, the agency will likely negotiate with your creditors and lenders to secure lower monthly payments you can afford.
What to watch out for
Not all credit counseling agencies are reputable. When exploring your options, ask the agency about its licensure status. Be sure to check with the office of the attorney general in your state to confirm the agency is licensed to operate in your state. Also, check for the grade and status with the Better Business Bureau. A poor rating or several reviews could indicate a lack of reputability.
It’s equally important to steer clear of for-profit entities that charge hefty service fees. This could be a sign of a debt settlement company disguised as a credit counseling agency, and signing up for services could do more harm than good.
When to use credit counseling
While you can self research ways to budget and pay down debts, it may help to have someone provide guidance. If you’d like a personalized plan tailored to your finances, credit counseling may be a good way to go.
DIY credit repair
If you have the time and don’t mind doing the work, DIY credit repair could be the ideal way to fix your credit score. In fact, the Federal Trade Commission (FTC) states that “anything a credit repair company can do legally, you can do for yourself at little or no cost.” And adopting the DIY credit repair approach also means you can avoid the monthly fees and keep more of your hard-earned money in your pocket.
How to repair your credit yourself
Here’s a step-by-step breakdown of how to repair your own credit.
Get copies of your credit reports. Visit AnnualCreditReport.com to retrieve your free credit reports from Experian, TransUnion and Equifax. They’re available weekly, free of charge, through the end of 2023 due to the coronavirus pandemic.
Review your credit reports. Look for errors and outdated information that should be corrected or omitted from your credit profiles. Highlight these items so you can quickly identify them for the next step.
File disputes with the credit bureaus. You can file disputes by mail, phone or online. Refer to this guide for detailed information on how to move forward.
Await results. The credit bureaus have 30 days to respond to your dispute. Based on their findings, they will either remove the item in question or update your credit file to reflect accurate account data.
Adopt healthy financial habits. In the meantime, be sure to pay all your bills on time to avoid adverse credit reporting. It’s equally important to start reducing the debt balances on your open accounts to improve your credit utilization rate. And if possible, refrain from opening new credit accounts you don’t need.
How long does it take to repair credit?
It depends on your credit profile and what’s in your credit report before starting the repair process. If inaccurate or outdated information is dragging your score down, your credit score could improve quickly if you file a dispute and the credit bureau(s) rules in your favor.
Otherwise, it could take some time to repair your credit as late payments, collection accounts and Chapter 13 bankruptcies linger for up to seven years. If you file Chapter 7 bankruptcy, it remains on your credit report for up to ten years.
The upside is the negative impact of adverse credit items dwindles over time assuming you responsibly manage other aspects of your credit health.
How to choose a method of credit repair
Selecting the best credit repair method comes down to your unique needs, financial situation and credit goals. If you’re dealing with challenging credit issues and can afford to pay for help, hiring a credit repair company could make financial sense. But if money’s tight, DIY credit repair may be ideal. Or, you can consult with a credit counseling agency to receive additional guidance at little or no cost.
