How do Credit Repair Services Work?
Good credit is a priority to a lot of financially conscious individuals, that’s why most people make efforts to repair their credit whenever possible. With good credit, you can get a loan, a fantastic interest rate, a competitive insurance premium, and even get a job that can be impacted by what’s on our credit reports.
If you have fallen into a situation with a bad credit condition, you will discover that there are a lot of options to get out of this situation including credit repair. First, you have to figure out what credit repair is and how credit repair services can assist you.
- What is Credit Repair?
- How Can a Credit Repair Company Help You?
- How Much Will it Cost to Repair my Credit?
- How Can I Choose a Credit Repair Company?
- Is it Worth Going to a Credit Repair Company?
- Can I Repair my Credit Myself?
- What Happens When You do Credit Repair?
- How do Credit Repair Companies Remove Negative Items?
- How to Dispute Inaccurate Items Yourself
- Is it Better to Pay Off Collections or Wait?
What is Credit Repair?
Credit repair is when a third party, often called a credit repair organization or credit services organization, attempts to get information removed from your credit reports in exchange for payment. These companies are for-profit and their services are marketed as being able to help people improve their credit. Credit repair is legal at the federal level and in almost every state (in Georgia, credit repair is a misdemeanor).
Some credit repair companies suggest their services are designed to help consumers remove inaccurate or unverifiable information from their credit reports. In reality, however, many credit repair companies are simply trying to get negative, but accurate, information removed from credit reports before it would naturally fall off a credit report. There are steps that you may be able to take to repair your credit if there’s inaccurate information on your credit history.
A credit repair company works on your behalf to remove this information by communicating with the credit bureaus (Experian, Equifax and TransUnion) and/or financial companies, like your bank or a debt collector, to dispute the errors.
There can be a lot of back and forth, but the end goal is to have negative information deleted from your credit file so your credit rating improves.
Credit repair companies don’t help you manage your money, which is a different service offered by credit counseling companies like the National Federation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA).
How Can a Credit Repair Company Help You?
Ultimately, credit repair companies communicate on your behalf either with the credit bureaus or with the companies that reported or “furnished” your credit information to the bureaus. These data furnishers are almost always debt collectors or financial services companies, like banks and credit card issuers.
The intent is to have the credit bureaus or furnishers either delete the credit information altogether or modify it in some way that’s more favorable to the consumer. Communications by credit repair companies can happen via the internet, phone or U.S. mail. The U.S. mail has historically been the method that’s preferred by credit repair companies for several reasons.
Mailing a few letters to the credit bureaus might sound unsophisticated, but it’s the approach that works with how credit repair companies tend to operate. Some credit repair companies employ a process called “jamming,” which involves sending repetitive and often frivolous letters to the credit bureaus and their data furnishers.
The theory is if a credit repair company can send a large volume of dispute letters challenging the same item over and over, that somewhere along the way either a credit bureau, lender or debt collector will fail to process the dispute within the 30-day period specified by the Fair Credit Reporting Act (FCRA), resulting in the account being deleted.
How Much Will it Cost to Repair my Credit?
Credit repair services aren’t free, but you won’t incur a fee until services are delivered. Fees are charged in one of two ways: monthly or per item removed from your credit report.
Monthly subscriptions charge you for services provided during the previous 30 days, while the latter only charges you once the info is removed from your credit file. The exact fees vary by service, but they can add up to hundreds or thousands of dollars every year.
The first is a garden-variety subscription service in which the credit repair company charges your credit card at the end of the month for services performed during the previous month. Subscriptions for credit repair generally fall somewhere between $50 and $100 per month, although there can be outliers. With the subscription fee structure, the credit repair company has a financial incentive to keep you as a paying customer as long as possible.
The second method of payment for credit repair is called “pay per delete.” With pay per delete, the credit repair company only charges you when an item on your credit report is actually deleted pursuant to their efforts. The theory with pay per delete is that it keeps the customer happy because they are only paying for tangible results, and the credit repair company stays on the right side of the CROA because they don’t charge their customers until after results have occurred.
How Can I Choose a Credit Repair Company?
Credit repair services aren’t always reliable or truthful. In fact, the CFPB found that more than half of people who submitted complaints about credit repair companies cited “fraud or scam.”
Thankfully, there are consumer protections. If you opt to use a credit repair company, you’re protected under the Credit Repair Organizations Act (CROA), which regulates how these companies can operate. Some key points include:
- Consumers have three business days to cancel a contract without charge.
- Companies can’t guarantee that they can remove information from your credit reports.
- Companies can’t advise you to make false statements or change your identity to prevent the credit bureaus from associating the information with you.
- Consumers can’t be charged any fee for services that haven’t been fully rendered.
Before signing up for any credit repair service, make sure they follow the CROA rules and look out for possible red flags, such as payments being demanded upfront or results that sound too good to be true. The CFPB lists more ways to avoid being misled by credit repair companies.
And better yet, dispute any errors on your credit report on your own. There is no fee to clean up your credit and you’ll avoid misleading companies that may take advantage of your poor credit standing. Remember that even if you pay to have information removed from your credit report, there’s no guarantee that it’ll boost your credit score.
Is it Worth Going to a Credit Repair Company?
The most common way credit repair businesses work is to dispute all negative items that appear on your report, whether they are accurate or not. Because the credit bureau has 30 days to investigate, this random dispute method can temporarily produce positive results. During the inquiry, the items in question won’t be included in a credit score, and a notice will appear under each disputed item. If the creditor doesn’t respond with proof that the item is accurate, the credit bureau will remove it.
Sound good? Well, there are a couple of problems with this process. The first is that if the information the credit repair service is disputing is indeed correct, they will re-report it the next time they submit data to the bureaus. Also, deliberately disputing accurate notations is an illegal misuse of the process. Lastly, if an item genuinely should not be on the report, the Fair Credit Reporting Act guarantees you the right to dispute the information with the bureaus easily and for free.
Another practice these types of businesses may use is to file segregation. This is where the credit repair service has you apply for an Internal Revenue Service Employer Identification Number (EIN), which has the same number of digits as a Social Security number. Once you have the EIN, you are then instructed to apply for new credit with it, so you can build an entirely new credit history. This practice is not only against the law, it is rarely effective. By starting all over again you will have a blank credit history, which lenders often perceive as negative or suspicious.
Can I Repair my Credit Myself?
You can repair your own credit in a number of ways. If the information on the report is inaccurate, simply contact the bureau on your own and dispute the item. For negative but accurate information, you have a couple of options:
- If the debt is nearing the time it will be removed, you may choose to let it drop off naturally. Most negative information won’t be evident after seven years from the date of last activity. Chapter 7 bankruptcy will show for ten years, and defaulted student loans and unpaid child support may remain until satisfied.
- If you have accounts in collections, you can either pay them in full or offer a settlement. Settled accounts don’t look as good on a report as those that are fully satisfied, so weigh the money you save against the effect on your credit report.
- Start using credit responsibly. The sooner you begin to borrow and repay the money, the faster you can heal past problems. A secured credit card or a credit-building loan are great ways to reestablish credit. With a secured credit card, you put down a cash collateral deposit (often a few hundred dollars) at your financial institution. That sum usually equals the credit line for that account. Use this card to pay for expenses that are within your spending plan. By always paying on time and never carrying a balance, you will create a positive credit history.
Building and maintaining a good credit rating keeps your opportunities open. However tempting it may be to pay someone to undo the damage, you are your own best resource. In short, no one can legally remove accurate and timely negative information from a credit report, and everything a credit repair clinic can do for you legally, you can do for yourself at little or no cost.
What Happens When You do Credit Repair?
Many credit repair companies start by requesting a copy of your credit report from each of the three major consumer credit bureaus — Equifax, Experian and TransUnion.
The company will review your credit reports for derogatory marks, like …
- Tax liens
Then, it will set a plan for disputing errors and negotiating with creditors to remove those items.
That plan may include sending …
- Requests to validate the information
- Letters to dispute erroneous negative marks
- Cease-and-desist letters to debt collectors on your behalf
The company may also recommend applying for new accounts to add positive information to your reports. Be cautious here. If you’ve had trouble managing credit in the past, a new account may not be the best option. Plus it’s not a great idea to take on more credit if you don’t need it.
The credit bureau usually has 30 days after receiving your dispute to investigate and verify the information. Typically, the credit bureau will reach out to the company that provided the information and ask it to investigate. The credit bureau is required to send you the results of the investigation within five business days of the completion of the investigation.
But if the credit bureau determines the dispute is “frivolous” it can choose not to investigate as long as it communicates that to you within five days.
How do Credit Repair Companies Remove Negative Items?
While you can attempt to fix your credit yourself, the process requires effort, patience, organization, and expertise. For what many consumers consider to be a reasonable price, you can hire a credit repair organization to do the work for you.
Credit repair organizations work with you by first identifying questionable and inaccurate items on your credit reports and then disputing those items with the credit bureaus.
Some disputes are easy to resolve, such as the removal of outdated information. Other disputes require more work, including submitting evidence to contest items and forcing the bureaus to validate questionable data. The ideal outcome is to remove enough negative items to give your score a boost.
Most credit repair services offer a free consultation to review your credit reports and identify fruitful areas worth challenging. The credit specialist will review with you the different plans the company offers, what services come with each plan, and how much each plan will cost you.
If you want to proceed, you engage the service by subscribing to a plan and paying a monthly fee. Most services recommend you subscribe for six months, but you can cancel at any time.
The credit repair organization will challenge a specified number of items on your credit reports each month, depending on your chosen plan. In some cases, a simple challenge is enough to correct or remove an item. In other cases, the service will formally dispute items by posting online communications containing the detailed objections and evidence required to fix the problem.
Upon receipt of a credit report dispute submission, the Consumer Financial Protection Bureau says each credit reporting company has 30 days to investigate the matter and decide what to do. In the course of the investigation, the bureau will forward disputes to the original credit provider that furnished the information. The information provider will review the credit report dispute and report back to the credit reporting bureau.
If the information provider finds that the information was inaccurate, it must advise that fact to all three credit bureaus and request its removal. When done, the credit reporting bureau will report the results in writing to you and send you a new copy of your report if any items were corrected or removed.
How to Dispute Inaccurate Items Yourself
You can embark on DIY credit repair by ordering your three credit reports from AnnualCreditReport.com, a source of free credit reports authorized by the federal government. You need all three reports (one from each credit bureau, Experian, TransUnion, and Equifax) because creditors may report transactions to only one or two credit bureaus.
After receiving the reports, review the four sections for errors:
- Identification: Information identifying yourself, including your address, date of birth, and Social Security number. Incorrect information may be a tip-off that the report covers accounts that don’t belong to you.
- Tradelines: This contains your account data, which includes your use of credit and your borrowing activity. The data includes loan and credit account balances, payment history, and a collection account or charge-off.
- Public records: Court information regarding adverse legal judgments, bankruptcies, liens, foreclosures, vehicle repos, and money owed for child support.
- Inquiries: Hard inquiries are those you authorize a credit provider to make when you apply for a credit card or loan. These can lower your credit score. Unauthorized soft inquiries have no impact on your score.
The hardest part of DIY credit repair is combing through your report data for accounts or account activity you don’t recognize, incorrectly reported negative credit file items (charge-offs, delinquencies, bankruptcies, etc.), and liens and judgments you have already paid. You also should check for hard inquiries you didn’t authorize.
If you come across inaccurate information, lodge a dispute via the credit bureau’s website, over the phone, or by mail. You should receive a written decision about a dispute within 30 days. Disputes settled in your favor may take a while to affect your credit file. If you don’t see the credit report error removed or corrected after two months, follow up with the credit reporting company.
You have the right to resubmit dispute judgments that went against you — but only do so if you have additional evidence to present. If you overdo it, the credit reporting company can mark the dispute as frivolous and ignore it.
You can attach a 100-word statement to each disputed item remaining on your report, explaining your position in detail, and backed with evidence and facts. While the statement won’t help your score, it gives creditors more context when they evaluate whether to grant you credit.
Is it Better to Pay Off Collections or Wait?
From the viewpoint of repairing your credit score, it’s better to pay off a collection sooner rather than later, assuming you can afford to do so. However, a paid collection will only help your credit score if the collector agrees to remove the item from your credit report. Short of that, paying off a collection may have no effect on your credit score.
As explained above, you may have bargaining leverage with a debt collection agency. This manifests when you submit a pay for delete letter that offers to pay the debt in return for removing the collection item from your credit report. Your offer may be for the full amount owed, but you can request a partial write-down of the balance due.
For example, suppose you had a $10,000 credit card balance and were unable to make payments. Eventually, the card issuer wrote off your account and sold it to a debt collection agency for 20 cents on the dollar. The issuer collected $2,000, which means the collection agency must collect at least that much just to break even.
The fact that your original debt was $10,000 may be less important to the collector than to the credit card issuer. If the collector were to collect, say, $4,000 on the old debt, it would rack up a gross profit of 100%. Therefore, the collector may be willing to accept a pay to delete deal.
Once you pay the $4,000, the collector will remove the item from your credit report, and your score should see some improvement. The sooner you can arrange this outcome, the faster your score will recover, with positive implications for your lifestyle.
But what if the collector refuses to remove the item from your credit report? Paying off the collector may be good for your soul, but it won’t help your credit score.
In that sorrowful case, you would, at best, be able to append a 100-word note to the item informing report recipients that you paid off the collection as of a specified date. True, it won’t help your score, but it may make a favorable impression on future decision-makers, including lenders, employers, and landlords. Paying off the collection clearly demonstrates your resolve to re-establish your creditworthiness.
Read Also: 7 Ways to Improve Your Credit Score
If you simply don’t care about your credit score, waiting to pay off the collection will allow you to keep the money you owe for a longer period. Even if you never repay the collector, the negative item will age off your credit report in seven years. If you are already several years into the collection, you may choose to ignore the collector and let the item age away.
Of course, your collector may take a very different view of the situation and haul you into court to grab the money you owe. This is a fresh opportunity to cripple your credit score because a court judgment against you and/or a forced bankruptcy will add additional negative items to your report.
If a collection is accurately reported on your credit report, a dispute (whether initiated by you or a credit repair service) won’t remove it. The only way to get rid of a bona fide collection is to successfully negotiate a pay for removal agreement or for the item to age off after seven years.