What are credit repair companies and how do they work?

If your credit score is low, and you aren’t sure how to improve it, working with a good credit repair company might help. Credit repair companies help you repair your credit by disputing misreported late payments and asking credit bureaus to remove accounts that aren’t yours and fix the balances on accounts you’ve paid off.

That said, there are limitations to what these companies can do to boost your credit. You also need to be able to tell the difference between legitimate repair companies and scammers who prey on customers with bad credit. It’s crucial to understand what a credit repair company is, how to vet the company and learn what alternatives are available. 

What is a credit repair company?

Credit repair companies help consumers improve their credit scores by identifying and disputing errors on their credit reports. These companies contact the three major credit bureaus — Experian, Equifax and TransUnion — on your behalf to remove any inaccurate information.

These companies can’t do anything you can’t do yourself for free — you can take steps to clean up your credit report on your own. However, working with one can be beneficial if you lack the time you’ll spend calling, keeping track of and following up on each account with each credit bureau until it’s fixed.

Think of a credit repair company like you’d think of a tax preparer. Sure, you can do your own income taxes, but sometimes it’s worth the money to hire a professional.

Howard Dvorkin, CPA and chairman of Debt.com

How do credit repair companies work?

Whether you hire a third party to repair your credit or DIY instead, the process will generally look the same. 

1. Request and review your credit reports from Equifax, Experian and TransUnion.
2. Identify inaccuracies, such as accounts that aren’t yours, outdated collections or incorrect balances.
3. Dispute errors with the credit bureaus after identifying mistakes.

A credit repair company manages these steps on your behalf by writing dispute letters, making calls and tracking responses. However, note that they can only address verifiable mistakes. 

How do credit repair companies fix your credit?

Credit repair can boost your credit by removing inaccurate negative information from your report. This may include:

• Accounts that don’t belong to you.
• Duplicate records.
• Incorrect late payments.
• Outdated collections or charge-offs that shouldn’t be showing up anymore.

Any company you hire can only remove actual mistakes, the same as you. If something is accurate, there’s nothing you or the company can do to remove it from your report.

How long does credit repair take?

The time it takes to repair your credit depends on the extent of damage. If your credit history contains only a few errors, corrections might be made in a couple of months. But, if you have a generally poor credit history, you will need to do more than remove a few inaccurate items from your report to improve your credit. In this case, repairing credit will require changing your spending habits and the ways you manage your debt.

Making timely payments on any debt you have and diversifying your types of credit utilization will help improve your credit over time. Paying down your debt will also help get your debt-to-income ratio in better shape. This can take as long as a few years to have an effect on your credit, depending on the state your credit score is in at the start.

How much does credit repair cost?

Credit repair services typically charge fees ranging from $50 to $150 per month. According to Experian, some will also charge a “setup fee” of up to $200 — an apparent loophole in the “no upfront fees” rule.

The cost also depends on what you’re paying for and what you’re willing to do yourself to repair your credit. For instance, if you took out a $10,000 personal loan:

• With a 7 percent interest rate, you’d pay $1,880 in interest.
• At 12 percent, you’d pay $3,347 — nearly double. 

Again, keep in mind you don’t absolutely need these companies to improve your credit.

How to verify credit repair companies

The credit repair industry is heavily regulated — but it also has its fair share of scams. The Credit Repair Organizations Act outlines strict rules to protect consumers. 

Watch for common red flags.

• Guaranteed results: Companies must not promise impossible results. They cannot remove accurate negative marks from your credit report or guarantee your credit will increase to a specific level. If they claim they can, look elsewhere.
• Upfront payments: It’s illegal for companies to charge you money before giving you any results. Report this illegal activity to the Federal Trade Commission.
• Shady advice: A scam company may ask you to misrepresent your identity and finances or may try to dodge questions. Do not work with such a company. Communication should be honest and transparent.
• No written contract: The law requires that you receive a contract in writing explaining the costs and services to be provided. Avoid companies that try to dodge this step.

Ways to improve your credit on your own

You don’t need a credit repair company to improve your credit. Try some of these DIY strategies:

• It’s easy and free to access your credit reports. You can get weekly reports through AnnualCreditReport.com. You may also be able to access your credit score for free through your credit card company.
• Dispute errors directly with the credit bureaus online or by mail.
• Build good habits like paying on time, keeping balances and avoiding new debt unless necessary.
• Don’t close old accounts — your credit history matters.
• You can establish new credit by opening new accounts, being an authorized user on someone’s credit card, getting a credit builder loan or starting an account with a cosigner.
• Consider working with a nonprofit credit counselor, such as those affiliated with the National Foundation for Credit Counseling.

Bottom line

Repairing your credit can put you on track for a higher credit score, making it easier for you to qualify for other loans with favorable terms in the future. Using a credit repair company can make this process easier, but it also comes at a cost. 

If you’re diligent enough, you can repair your credit on your own for free, but it will require a significant time commitment and disciplined follow up. It may be worth it to seek out credit counseling before you pursue a credit repair company to get an unbiased opinion of your financial outlook first.