Credit Repair Options, How They Work And How To Choose

More than one-quarter of American consumers (28.4 percent) have a credit score that’s considered either poor or fair. If your credit score is lower than you’d like, there are several options for repairing it and improving it. The best option will depend on your goals and the factors hurting your credit score.

1. Credit repair companies

Credit repair companies help people clean up their credit reports by fixing incomplete, outdated or incorrect information.

How credit repair companies work

Credit repair companies start by getting copies of your credit reports from the major credit bureaus. Then, they identify errors that could be lowering your score, such as an account incorrectly reported as delinquent or a debt belonging to someone else.

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.

How to choose a reputable credit repair company

There are many legitimate credit repair companies, but scammers also prey on people desperate to fix their credit. Steer clear of companies that:

• Demand upfront payment: It’s illegal for credit repair companies to request payment before services are rendered.
• Guarantee removal of credit information: Negative marks on your credit report that are correct and timely can’t legally be removed by a credit repair company.
• Failure to disclose your rights: Credit repair companies must explain your rights as a client and how you can handle the dispute process independently.
• Refuse timely cancelation 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

You might prefer to use a credit repair company if you’re unfamiliar with the process or too busy to file disputes on your own. Getting professional help could also be a good option for dealing with complex credit repair issues like identity theft.

2. Do-it-yourself credit repair

Consumers have the option to fix their own credit. 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.”

How DIY credit repair works

DIY credit repair works much the same way as professional credit repair, but you’ll need to handle each step of the process. That involves everything from requesting copies of your credit reports to filing disputes with the relevant credit bureaus.

DIY-ing your credit repair isn’t for everyone, but it means you won’t be responsible for paying any fees, which can come with other repair methods.

How to repair your credit yourself

Repairing your credit can be a time-consuming and involved commitment, but it’s possible to tackle the process on your own. Here’s how to do it, step by step:

1. Get copies of your credit reports: Visit AnnualCreditReport.com to request free copies of your credit reports from Experian, TransUnion and Equifax. You’ll need a report from each bureau because they work independently and may have different information.
2. Review your credit reports: Look for errors and outdated information that should be corrected or removed from your credit profiles. For example, you might notice a closed account wrongly reported as open or an error in a credit limit.
3. File disputes with the credit bureaus: To get mistakes fixed, file a dispute with each bureau reporting the incorrect information. You can file disputes by mail, phone call or the company’s online portal.
4. Wait for results: After receiving your dispute, the credit bureaus generally have 30 days to complete an investigation, and then another five days to notify you of the results. If your dispute is successful, the credit bureau will correct your report.

When to take a DIY approach

A DIY approach could be the right choice for those with a solid understanding of the credit repair process — or an interest in learning — and the time to dedicate to the effort.

3. Credit counseling

Credit counseling is a service that aims to help people take control of their finances and avoid bankruptcy, foreclosure or other credit issues.

How credit counseling works

Credit counseling is offered by nonprofit credit counseling agencies, often free of charge, and by for-profit companies. It helps you create a plan to address your habits and debts.

If you decide to go this route, you’ll be partnered with a credit counselor. During your first meeting, you share your financial information so your counselor can tailor an action plan based specifically on your financial health. For example, they might suggest combining high-interest debt with a debt consolidation loan.

Alternatively, the counselor may suggest a debt management plan (DMP). 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 any discharged debt.

How to choose a reputable credit counselor

Unfortunately, not all companies that offer credit counseling services are reputable. When exploring your options, it’s a good idea to:

• Confirm the agency is licensed: Check with your state’s attorney general office to confirm the agency is licensed to operate in your state.
• Read online reviews: Check for the grade and status with the Better Business Bureau and Trustpilot. A low rating or several reviews with similar complaints could indicate a poor reputation.
• Search for nonprofit agencies: Some companies advertising credit repair services are for-profit entities that charge hefty service fees. Consider contacting the National Foundation for Credit Counseling to connect with a nonprofit counselor in your area.

When to use credit counseling

Credit counseling may be a good option if your credit score is low for legitimate reasons — like payments you truly did miss or using all your available credit — and you want guidance to get your finances back on track. In the long run, addressing your habits could benefit your credit score.

4. Debt consolidation

Debt consolidation is the process of securing a new loan with a lower interest rate to pay off multiple debts to make it easier to pay off your debt.

How debt consolidation works

Debt consolidation loans are offered by banks, credit unions and other lenders. When you’re approved for a debt consolidation loan, the funds are used to pay off your credit card balances and other outstanding debts. Then, you can repay your debt with a single monthly payment.

Combining multiple credit card debts into one new personal loan may improve your credit by lowering your credit utilization ratio. Credit utilization makes up 30 percent of your FICO score. Plus, if you qualify for a loan with a lower interest rate, you may lower your payments and find it easier to maintain a good payment history (35 percent of your score).

How to choose a reputable debt consolidation lender

If you plan to take out a debt consolidation loan on your credit repair journey, be sure to vet potential lenders carefully:

• Avoid unsolicited loan offers: Reputable lenders typically expect potential customers to approach them, rather than the other way around. A lender contacting you first may be a sign of a scam.
• Check for upfront fees: Legitimate lenders do not charge large upfront fees before providing debt consolidation loans. Companies that charge large fees may actually be debt settlement companies.
• Read reviews: Read reviews from customers and reputable sites like Bankrate to learn about a potential lender’s reputation.

When to use debt consolidation

Debt consolidation could be a good credit repair choice for people whose credit scores are being dragged down by high credit card balances.

The bottom line

If you want to improve your credit score, you can choose from multiple credit repair options. Depending on your situation, you could try to repair your credit on your own, hire a credit repair company or credit counselor or take out a debt consolidation loan.

To decide which credit repair option is right for you, request copies of your credit reports. If errors are dragging down your score, you might consider getting help from a credit repair company. On the other hand, if there are legitimate reasons why your score is low, credit counseling or debt consolidation might be a better choice.

Frequently asked questions

• What is considered bad credit?
  

  It depends on the credit scoring model. In the FICO model, a poor credit score is a score between 300 and 579. Your score is considered fair if it’s between 580 and 669. In the VantageScore model, scores between 300 and 499 are rated “very poor,” while scores between 500 and 600 are “poor.”

   

• How long should credit repair take?
  

  There’s no one-size-fits-all timeline. Depending on the reasons why your credit score is low, it could take anywhere from a few months to several years to see the results you want.

• How much do credit repair options cost?
  

  The cost of repairing your credit will vary depending on the method and company you choose. It’s possible to repair your credit on your own for free, though the tradeoff is you’ll spend time and effort.