Different types of credit repair and how they work

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 The most common strategy is credit repair, which involves addressing errors and outdated information with the main three credit bureaus.

Credit repair companies

Credit repair companies handle the back-end work for you, often 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 and lenders to have accurate and timely items removed in exchange for lessened amounts. However, creditors aren’t legally obligated to work with repair companies, so debt removal isn’t always an option. If this is the case, the credit repair company will likely advise you on best practices to soften the overall impact of the debt on your credit report.

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. 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.

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 removal of credit information. You may want to check twice if a company promises to erase negative marks on your credit report. Correct and timely information — even if disputed — 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. When working with a new company, you have up to three business days to cancel your contract without incurring fees.

When to use a credit repair company

Under the Fair Credit Reporting Act, 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 worth the added cost.

Credit counseling

Credit counselors are offered by nonprofit credit counseling agencies, often free of charge. You may have to pay a fee for these services, but it will likely be less than you would pay working with a debt relief company.

How credit counseling works

If you decide to go this route, you’ll be partnered with your own credit counselor. The first meeting typically consists of sharing your financial information so your counselor can tailor an action plan based specifically on your financial health.

In some instances, the counselor may suggest a debt management plan (DMP) to help you handle 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. If your debts are successfully negotiated, you may need to pay a fee to the agency consisting of a small percentage of the discharged debt.

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 attorney general’s office 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. It’s important to know the difference between the two. Debt settlement often comes with hefty fees and, in certain cases, can result in more debt and credit damage than when you started.

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. Credit counseling may be a good way to go if you’d like a personalized plan tailored to your finances.

DIY credit repair

If you have the time and are fairly familiar with the process, DIY credit repair may be the best option for your wallet. DIY-ing your credit repair means you won’t be responsible for paying any fees, which can come with other repair methods.

Consumers have a right to take their credit health into their own hands under federal law. 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.” However, this isn’t the best option for everyone. Only those generally organized and familiar with the repair process are advised to move forward.

How to repair your credit yourself

Repairing your credit is a timely and involved commitment. But with some dedication and an educated view of your financial health, you can repair your score without the help of any outside agencies or companies. Consider these five steps to maximize your potential credit repair results.

Get copies of your credit reports

Visit AnnualCreditReport.com to retrieve your credit reports from Experian, TransUnion and Equifax. Every consumer is entitled to one free credit report per year. After that, checking your report within the same year will cost a fee.

Review your credit reports

Look for errors and outdated information that should be corrected or omitted from your credit profiles. This can include anything from incorrect debt amounts, outdated income repayment information or incorrect personal information. Regardless of the nature of the discrepancy, pay attention to — and highlight — every error so you can quickly identify them.

File disputes with the credit bureaus and await results

You can file disputes by mail, phone call or the company’s online portal. The credit bureaus have 30 days to respond to your dispute. However, an investigation can take up to 45 days from the time you file the dispute. Based on the agency’s findings, the item in question will either be removed from your report, or they’ll update your profile to reflect the current account data.

Adopt healthy financial habits

While waiting for the bureau to respond to your dispute, be sure to pay all your bills on time to avoid adverse credit reporting. It’s equally important to start reducing your active debt to improve your credit utilization ratio. If possible, refrain from opening new credit accounts you don’t need as well.

How to choose a method of credit repair

If the cost of hiring a credit company fits comfortably within your budget, outsourcing your repair journey can make the process smoother. If cash is tight or you prefer a more hands-on approach to your finances, going with a credit counselor or taking the DIY approach may be better for your situation.

You may also be able to take steps to consolidate your debt on your own. There are several options to choose from, including debt consolidation loans, if your credit allows for it.