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What is Credit Repair?
By Jamela Adam MONEY RESEARCH COLLECTIVE
We all make mistakes. Some of them are easily forgiven the next day, while others can haunt us for years to come. The latter is their unfortunate reality for the millions of Americans who have a troubled credit history. Poor credit scores and credit problems can affect all areas of their lives, from getting approved for a car loan to renting an apartment to getting a job to getting the best insurance rates.
If you find yourself in such a predicament, don’t despair. While having bad credit can seem like a doom and gloom situation, there may be ways to improve your creditworthiness. Credit repair is one of the steps you can take. Read on to learn about what credit repair is, how it works, as well as how to repair your credit on your own.
What is credit repair and how does it work?
If you’re like most people, you’ve probably had a few credit missteps in your past. Maybe you missed a payment or two, or maybe you overextended yourself. Whatever the reason, if your credit score is less than ideal, you might want to think about credit repair. Credit repair is the process of fixing errors on your credit report and rebuilding your credit health. It can often be a time-consuming and frustrating process, which is why many enlist credit repair companies to help.
Keep in mind that hiring professionals to repair your credit is only effective if the negative information on your credit report is actually incorrect. If your credit damage is due to several missed/late payments throughout the years, it’s unlikely that credit repair professionals will be able to make those stains magically disappear.
How does credit repair work?
Whether you decide to repair your credit on your own or have a credit repair service do it for you, the steps are the same. Begin by requesting a copy of your credit report from each of the major credit reporting agencies — Experian, Equifax, and TransUnion. If you’re wondering how to get your credit report, it’s actually quite straightforward. Simply head to annualcreditreport.com to request your copies. Under federal law (the Fair Credit Reporting Act), you’re entitled to a free copy of your credit report from each of the major credit bureaus every 12 months.
Once you’ve received your reports, review them carefully for any inaccuracies. If you find erroneous entries, you can dispute them by sending a letter to the credit reporting agency and providing supporting documents. The credit bureau will then investigate your dispute and notify you of the results in writing. If the negative item is indeed a mistake, it’ll be deleted from future reports. But if the entry on your report is deemed accurate, the credit bureau will stop the investigation and the negative item will remain.
Note that the mechanics of the dispute process can vary slightly depending on the credit bureau, so be sure to check each of their websites for more information and specific instructions.
How long does credit repair take?
In general, credit reporting agencies have around 30 days (45 days in some cases) to respond after receiving your dispute letters. If the information on your credit report is found to be inaccurate after the investigation, creditors or debt collectors are required to provide updated information to the credit bureaus. And once the credit bureaus have received notice of the inaccurate information, you should see the update reflected on your report within another month.
Repairing your credit isn’t an overnight process. It can take anywhere from a few weeks to a few years to rebuild credit, depending on the severity of the damage and your credit history. For example, if you have several errors on your credit report, it will take longer to get them corrected. Likewise, if you have a long history of late mortgage payments and even foreclosures and bankruptcies, it will take longer to repair your credit than if you have just one missed credit card payment.
Credit repair is also an ongoing process. Even after negative items have been removed from your report, you’ll need to continue to make timely payments and use credit responsibly to prevent your credit score from dropping again.
What do credit repair companies do?
A credit repair company, as its name suggests, operates with the goal of helping you repair your credit record through a variety of services. The most common one is correcting errors on credit reports and filing disputes with credit bureaus on your behalf. Credit repair companies can also help spot reporting errors that you would’ve missed if you were to check your credit reports yourself. By hiring these professionals to do all the heavy lifting for you, you can avoid the hassle of navigating the credit repair process on your own — which can be overwhelming if you’ve never done it before or have a lot of negative items to sort out.
Apart from repairing damage to your credit history, some companies also help you develop strategies to manage your finances going forward. This may include providing budgeting and financial counseling, helping to create a plan for paying off debt and monitoring credit reports for continued accuracy.
How much does credit repair cost?
Credit repair is completely free if you do it yourself. But if you’d like a professional to guide you through the process, be prepared to pay anywhere from $79 to $129 for monthly fees, plus a one-time setup fee. Of course, your credit repair cost can vary quite a bit depending on the provider you choose and the membership plan you opt for. The more features and perks, the costlier the service. For example, suppose you want access to credit monitoring tools and unlimited credit disputes. In that case, you’ll generally need to upgrade to a higher tier membership and pay a steeper monthly subscription fee.
When choosing a credit repair company, be sure to watch out for red flags such as having to pay a huge sum of money upfront before any service is performed; this practice is prohibited under the federal Credit Repair Organizations Act (CROA). Keep in mind that many legitimate companies will require a small setup fee, which is common in the industry. But if you’re being pressured to pay many hundreds or even thousands of dollars in credit repair fees upfront, you’re likely dealing with a credit repair scam.
How to repair your credit
Apart from disputing credit report errors or paying credit repair companies to do so on your behalf, there are plenty of other ways to fix and build credit.
Stay on top of your bills
Your payment history is a major factor when it comes to your creditworthiness. In fact, it accounts for 35% of your credit score. Even if you only miss one mortgage or car payment, the consequences can be detrimental. According to a FICO credit activity report, a 90-day late payment can drop a credit score as much as 180 points. Not to mention that the negative credit information can stay on your report for seven years.
If you’re not the best at keeping track of your bills, consider using a personal finance app that comes with bill trackers and reminders. This way, you’ll have a simple and organized place to manage all of your upcoming payments. Another way to stay on top of your bills is to sign up for automatic payments. This is ideal for payments that won’t fluctuate much throughout the repayment period — such as your student loans. It’s worth mentioning that federal student loan providers and many private lenders offer a 0.25% interest rate deduction when you sign up for auto payments.
Aim for a 30% utilization or lower
Credit utilization is another key factor that makes up around 30% of your FICO score. In a nutshell, your credit utilization ratio is the amount of credit you’re currently using divided by your total credit limits. For example, if you have a credit limit of $2500 and a balance of $1250, your credit utilization ratio is 50%.
Generally, experts recommend keeping credit utilization under 30%. Because if you’re using a large percentage of your available credit, it may indicate to lenders that you’re overextended or having difficulty managing your debts. To keep your credit utilization in check and boost your credit score, make sure to only use a small portion of your available credit.
Tackle past due accounts
Past due accounts such as overdue credit card debt can be a major drag on your finances; they can also take a toll on your credit score. So when repairing your credit, one of your priorities should be paying down these accounts. By bringing your account balances up to date, you’ll send a positive signal to creditors and help improve your creditworthiness.
If you have an overwhelming amount of high-interest debt, you might want to take out a debt consolidation loan to help with debt management. Let’s say you have three different credit cards with balances of $1,000, $4,500, and $5,000 — and interest rates of around 16%. If you consolidate these debts into one single loan with a 6% interest rate, you could save a huge chunk of change on interest payments.
And if you’re also struggling with a significant amount of tax debt, exploring relief programs offered by the government can also be a wise decision. Some of these government programs allow you to pay back tax debt in smaller increments and even settle your debts without repaying the full amount — provided that you meet the qualifications.
Expand your credit file
Your credit file is a record of all your credit activity, including your borrowing and repayment history, as well as credit inquiries. If you have a thin credit file, it’s likely that your credit score will be lower than someone with a credit file that contains much more information. But don’t worry, you’re not alone. According to an Experian report, more than 62 million Americans are considered ‘credit invisible’ due to thin credit files. Fortunately, there are ways to expand or ‘thicken’ your credit file.
- Experian Boost: If you have phone payments, internet bills, as well as other monthly expenses, Experian Boost can report these payments to enhance your credit file. In other words, this service gives Experian, the credit reporting bureau, additional information to more accurately judge your creditworthiness.
- UltraFICO: UltraFICO is a credit scoring model developed by FICO that allows you to ‘thicken’ your credit files by demonstrating your money management skills. By linking your banking activities to the service, UltraFICO can use the information from your accounts to better assess your financial behavior — and boost your credit score to reward good personal finance skills.
Send A Goodwill Letter To The Creditor
If the negative information on your credit report is accurate, there may still be a way to limit the damage to your credit score by sending a goodwill letter to the creditor. In this letter, you’ll acknowledge the truth of what’s on your credit history but politely ask the creditor to remove the negative mark as a gesture of goodwill.
Though there aren’t any concrete studies or statistics on the success rate of goodwill letters, it’s believed that they can be quite effective – especially if you’ve had a long relationship with the creditor and have shown a positive payment history. Creditors in this situation may more likely believe that your mistake was a one-time occurrence instead of an ongoing problem – and will want to keep your business.
Summary of Credit Repair
If your credit score is less than stellar, don’t lose hope. You can take steps to repair it yourself by staying on top of monthly payments and using credit responsibly. And if you need help getting started, consider working with a reputable credit repair company. Just be sure to do your research beforehand so that you can find the best credit repair professionals to help get your credit back on track.
