Credit Repair
What Is Credit Repair?
Credit repair is the process of fixing poor credit standing that may have deteriorated for a variety of different reasons. Repairing credit standing may be as simple as disputing mistaken information with the credit agencies. Identity theft, and they damage incurred, may require extensive credit repair work.
Another form of credit repair is to deal with fundamental financial issues, such as budgeting, and begin to address legitimate concerns on the part of lenders.
Though numerous companies claim they can clean up bad credit reports, correcting erroneous information that may appear on credit reports takes time and effort. The details cited to credit reporting agencies cannot be removed by a third party. Rather the details, if misrepresented or inaccurate, can be disputed. Credit repair companies may investigate such information, but so can the individual the report is assessing. Individuals are entitled to free credit reports every 12 months from credit reporting agencies, as well as when an adverse action is taken against them, such as being denied credit based on information in the report.
Disputes may be filed when incomplete or inaccurate information appears on their credit reports. Aside from correcting such information, or catching fraudulent transactions on one’s credit, rebuilding and repairing credit can rest more heavily on credit usage and credit activity.
The payment history of the individual can be a significant factor on their credit standing. Taking steps to make sure payments are up to date or improve the payment schedule for outstanding credit can beneficially affect their credit score. Furthermore, the amount of credit used by the individual can also play a role. For instance, if an individual is actively using large portions of the credit available to them, even if they are maintaining minimum payments on time, the size of the debt they are carrying can negatively affect their credit rating. The issue is that their liquidity may be pressured by the overall debt against them. By taking measures to reduce their overall debt load, they may see improvements to their credit profile.
A number of businesses claiming to do credit repair have sprung up over time, and while some may provide services that can assist consumers, the actual results of their efforts may be questioned. In some cases, credit repair may require legal as well as financial expertise. Depending on the extent of the problem, it may require simply cleaning up misunderstandings, while in other cases professional intervention is needed.
The fees a credit repair company charges can vary. Typically, there are two types of fees: an initial setup fee and a monthly service fee. The initial fee can range from $10 to $100, while the monthly fee typically runs between $30 and $300 a month, although some companies do charge more.
When considering the fees, it’s important to weigh what you’re getting in return. According to the Federal Trade Commission (FTC), credit repair firms can’t legally do anything for you that you can’t do for yourself.2 You just have to be willing to spend the time reviewing your credit reports for negative or inaccurate information, reaching out to the credit bureaus to dispute that information, and following up on those disputes to make sure they’re being investigated. If you're unable or unwilling to spend that time, then do your research to ensure you'll be working with one of the best credit repair companies like ours.
How Bad Is My Credit Score?
Why Credit Scores Matter
With a bad score, few banks will take a chance on you. Those that do will likely offer you only their highest rates. Even a so-so score may jack up rates compared to those offered to people with excellent credit.
A bad credit score can also increase your insurance rates or cause insurers to reject you altogether. It can stand between you and the apartment you want to rent. Negative items in your credit report can even hurt you when you apply for a job.
Let’s take a look at what is considered a bad credit score, how you might have gotten there, and what you can do to fix it.
Do You Have a Good or Bad Credit Score?
Credit scores, which may range from 300 to 850, take into account a number of factors in five areas to determine your creditworthiness: your payment history, current level of indebtedness, types of credit used, length of credit history, and new credit accounts.
A bad credit score is a FICO score in the range of 300 to 579. (FICO stands for Fair Isaac Corporation, the company that originated the most widely used credit scoring system.) Some score charts subdivide that range, calling “bad credit” a score of 300 to 550 and “subprime credit” a score of 550 to 620. Regardless of labeling, you’ll have trouble obtaining a good interest rate or getting a loan at all with a credit score of 620 or lower. In contrast, an excellent credit score falls in the 740 to 850 range.
Things That Can Hurt Your Score
Borrowers with bad credit usually have one or more of the following negative items on their credit reports:
- Delinquent payments
- Charge-offs
- An account in collections
- A foreclosure
- A short sale of real estate, such as a home
- A deed in lieu of foreclosure
- A bankruptcy
Your payment history counts for 35% of your score, so missing your payment due dates seriously hurts your score.3 Being 31 days late is not as bad as being 120 days late, however, and being late is not as bad as failing to pay for so long that your creditor sends your account to collections, charges off your debt, or agrees to settle the debt for less than you owe.
How much you owe relative to how much credit you have available is another major factor, accounting for 30% of your score.3 Say you have three credit cards, each with a $5,000 credit limit, and you’ve maxed them all out. Your credit utilization ratio is 100%. The scoring formula looks most favorably on borrowers whose ratio is 20% or lower.
The length of your credit history counts for 15% of your score.3 You don’t have much control over this component. Either your credit history stretches back several years or it doesn’t.
The number of new credit accounts you have counts for 10% of your score, which means that applying for new loans to move your debt around might hurt your score.3 On the other hand, if moving your debt lands you a lower interest rate and helps you get out of debt more easily, new credit could ultimately boost your score.
The types of credit you use count for the remaining 10% of your score.3 If you have an auto loan, a mortgage, and a credit card—three different types of credit—it can mean a better score than if you only have credit cards. Again, don’t worry too much about this one. Applying for different types of loans in an attempt to improve your score will have little impact and only get you further into debt—not what you want if you have less than stellar credit. Instead, focus on paying down your balances and making your payments on time.
Does No Credit Mean Bad Credit?
Having no credit history and no credit score—as might be the case if you're just out of school or newly arrived in the U.S.—doesn't mean you have "bad" credit. Even so, it can make it harder to rent an apartment, open a credit card account, or obtain a loan. In many cases, you can get around your lack of a score by using alternative methods to prove your financial responsibility.
If you want a mortgage, for example, you can submit a history of timely rent and utility payments with your mortgage application. Or, if you aren't eligible for a conventional credit card, you can apply for a secured credit card, which, after a period of time, may qualify you for a conventional one.
3 Tips for Improving a Bad Credit Score
Here are some simple steps you can take that will almost certainly improve your score over time.
1. Make at least the minimum payment on time, every time, on every account. You may not have the cash to totally pay off your balances or even make a serious dent in them, but if you can at least make the minimum payment by the deadline each and every month, that will help your score.
2. Try to fix significant credit report errors. You can obtain your credit reports once a year, free of charge, from the three major credit reporting agencies (Equifax, Experian, and TransUnion) at the official website for that purpose, AnnualCreditReport.com. The three agencies' reports may differ somewhat, depending on what information they collect. If you find an error on any of them, you can file a "dispute," following the steps outlined on that agency's website. The agency is then required to investigate the matter and report back to you. For additional help spotting errors on your credit report, consider taking advantage of one of the best credit monitoring services.
3. Talk with your creditors. If you’re having trouble repaying your debts, see if you can work out a more favorable arrangement with your credit card companies or other lenders. Make sure you get any agreement in writing. Be aware that some arrangements can hurt your score, though. Asking to have your credit card payment due date changed to five days after you get your paycheck, for example, will not hurt your score, but getting your creditor to reduce your loan balance will.
The end game here is not just improving a three-digit number, but correcting the problems that might have gotten you into a difficult financial situation in the first place. In the long run, it’s not about having a 740 credit score, nice as that might be, but having your debts under control and being able to focus on your financial goals for the years ahead. If you need additional help removing negative marks from your credit report, the best credit repair companies can speak with the three major credit reporting agencies on your behalf.
Avoid These Credit Repair Mistakes
16 ways you can mess up your attempts to clear your credit record
Credit repair involves removing or correcting inaccurate information from your credit report to provide a fair and complete picture of your finances, taking steps to boost your credit score, and resolving to avoid credit problems in the future. You can do this yourself or hire a company that specializes in credit repair to do it for you. Either path can present opportunities for error. Be sure you know your rights and avoid the 16 mistakes listed below.
Know Your Rights
Several laws protect consumers when it comes to credit. These include the Credit Repair Organizations Act (CROA); the Fair Credit Reporting Act (FCRA); the Fair and Accurate Credit Transactions Act (FACTA) of 2003; and the Fair Debt Collections Practices Act (FDCPA) of 2010. Among other things, these laws stipulate that:
- You must have free access to your credit reports once a year.
- You may dispute errors on your credit reports, and credit agencies must correct them if proved.
- You must be informed when your credit report has been used to, for example, deny you a loan.
- You must give permission for your credit information to be provided to someone else.
- The amount of time negative information remains on your reports is regulated.
- Creditors must follow rules when it comes to contacting you about debt, including staying within certain hours and not making threats or informing family members about your debt.
- Credit repair agencies cannot lie to your creditors or encourage you to lie, alter your identity, or misrepresent their services. They also must provide you with a contract and a three-day cooling off period. If a firm doesn’t adhere to any of these standards, then there’s a chance you’re dealing with a scammer, instead of one of the best credit repair companies.
Knowing your rights is only part of the picture. You must also avoid making mistakes along the way. Here is what to watch for.
Mistake #1: Failing to Check Credit Reports
Step one in repairing your credit involves knowing what your credit reports say. If you have never requested your reports, or it has been at least 12 months since you last looked them over, you can check your reports by going to the Federal Trade Commission (FTC) Free Credit Reports page and following directions. Other websites sell access to credit reports and a few even offer select reports for free, but the FTC gateway ensures you get the reports guaranteed by the FCRA. Read all three reports carefully, looking for information you believe to be false or inaccurate.
Mistake #2: Procrastinating
Don’t put off credit repair. If you discover negative information on any of your credit reports and believe it to be wrong, you should try to correct the record as soon as possible. Although most negative information comes off after seven years, that’s a long time to live with an inaccurate credit report.
Mistake #3: Avoiding Credit Education
Whether you are attempting to remove or correct bad information on your credit reports or simply trying to reduce debt and forge a new financial path forward, the more you know, the better. This includes knowing how to dispute wrong information in your credit report as well as knowing you probably need to pay down high-interest credit card debt before installment loans.
Mistake #4: Not Keeping Documentation
Complete and accurate documentation regarding all debt is essential to disputing wrong information, protecting your rights, and keeping spending within parameters that make sense for you. You should know the penalties for missing a payment as well as the optimum conditions for requesting a credit increase. Be able to show payments were made on time and always be prepared to back up your claims with paperwork.
Mistake #5: Disputing Too Much
Obviously, you should only dispute things you honestly believe are inaccurate. Some credit repair companies like to dispute everything in the hope that one or two things “stick.” The problem is that credit bureaus are not likely to take such an approach seriously. Even if they do, you could end up removing positive information that helps your credit score. It’s also important to take your dispute to the right entity. In most cases that will be the credit agency, not the creditor.
Mistake #6: Disputing Online
All three credit agencies provide online dispute systems, but critics say using those systems may rob you of some of your rights under FCRA. The online systems allow credit agencies to avoid doing things—for example, forwarding your information to creditors, providing you with written responses to your disputes, and providing you with the “method of verification” of the item you disputed. Instead, you should file your dispute using paper “hard copies” and certified snail mail, critics say.
Mistake #7: Disputing with Boilerplate Language
Along with not disputing “everything” it’s also wise to individualize the language in your dispute filing to avoid having the credit agency “red flag” your paperwork for being repetitive. Instead, use the template as a guide and make sure the words are your own.
Mistake #8: Sending Uncertified Mail
Any paperwork you send to a credit agency, collection agency, or creditor should be sent certified mail with return receipt requested. This provides you with the documentation mentioned above as well as proof the agency received your letter. The same “proof” rule applies to any communication to you from any of the above entities. Do not verbally agree to anything unless it is also in writing. That way you will know what the agency has agreed to and, more important, will have written
Mistake #9: Falsifying Documents
Offering false and misleading statements or written communication isn’t just illegal for creditors and credit agencies. If you lie, chances are you will be prosecuted. Documentation you provide as part of a dispute or question about an issue of credit must be accurate. You need not elaborate, but what you say must be true.
Mistake #10: Transferring Credit Card Balances
Transferring a balance from one credit card to another is not a good credit repair tactic. You will still owe the same amount and in most cases the balance transfer fees will outweigh whatever interest advantage you may get. The same applies to consolidating debt onto a single credit card, especially if you close the other cards, thereby losing any available credit they would show.
Mistake #11: Missing Payments
Another credit repair mistake some people make happens when they miss payments on some accounts to make payments—or larger payments—on others. The only exception might be if the account in question has either already been charged off or gone to collections. If choosing between paying a collection account and one that is current, always pay the current account to keep it that way.
Mistake #12: Canceling Credit Card Accounts
Since 35% of your credit score is based on your credit history, it’s seldom a good idea to close a credit account. It may be much better to keep a small balance and pay it off monthly instead of canceling the account or cutting up the card. It will take discipline to keep from going into debt, but your credit score will be higher for the effort.
Mistake #13: Applying for New Credit
If you’re trying to repair your credit, the chances of being approved for additional credit, especially unsecured credit, is not great. You could be wasting a hard inquiry that ends up lowering your credit score right at the time you’re trying to raise it. It’s best to save applying for new credit for later—after your credit has been repaired.
Mistake #14: Paying Debt Collectors
It may sound counterintuitive, but paying a debt collector can cause unforeseen damage. If, for example, you have old debt that has outlived the statute of limitations, making a payment on that debt could update the debt. If you are unsure about the validity or status of the debt, it’s important not to pay until and unless the debt collector proves the debt is legit and current. It’s important to remember that debt collectors are expert at trying to frighten you into paying up. Don’t pay based on anything verbal. Written communication is the only acceptable form of communication.
Mistake #15: Hiring a Shady Credit Repair Company
Some people don’t feel they have the time or expertise to do their own credit repair. For those people, hiring a credit repair company can be beneficial and convenient although the convenience comes at a price. According to Credit Karma, the cost of professional credit repair services could include a flat fee or “per deletion” charge of $35 or more. Total cost could go up to $750 or more. Some companies charge a monthly fee ranging from $50 to $130 or more. Only you can decide if the cost of paying someone else to repair your credit is worth it. It’s worth noting that credit repair companies in general don’t have a great reputation, so review your rights above and as spelled out in the CROA.
Mistake #16: Filing for Bankruptcy
Some people think they need a fresh start and decide to “repair” their credit by filing for bankruptcy. Unfortunately, bankruptcy will not improve your credit rating, it will remain on your credit report for up to 10 years, and even when it’s gone, many lenders will ask if you’ve ever filed for bankruptcy as part of the loan application process and use that as a reason for not approving a loan.
Do Credit Repair Companies Really Work?
Legitimate ones can help you, but beware of scams
Credit repair companies offer to help consumers improve their credit scores in return for a fee. Some are legitimate businesses, while others are little more than scams. Here is what a credit repair company can, and can’t, do for you.
Understanding Credit Repair
Consumers' credit scores are based on a number of factors, including whether they pay their bills on a timely basis. Missing payments can hurt their credit score and, in turn, make it more difficult for them to obtain other credit, such as a mortgage or car loan, in the future. A poor credit score can also mean having to pay higher insurance rates and even make it more difficult to get a new job or rent an apartment.
Credit scores are calculated based on the information in the consumer's credit report, and sometimes that information is inaccurate. That can happen when creditors report erroneous information to the credit bureau or if an identity thief takes out credit in the consumer's name.
Credit repair is the process of trying to correct those problems. If the information is accurate, there is little that anyone—even a professional credit repair company—can do to change it. In most cases, it will remain on the credit report for up to seven years, after which it will disappear.
However, if any of the information in a credit report is inaccurate, the consumer has a right to dispute it. They can either do it by themselves or pay someone else to help.
Bear in mind that there is nothing that a credit repair company can do for you that you couldn't do on your own. 1 But you might consider hiring one if you feel overwhelmed by the process or simply don't want to devote your time to it.
Understanding Credit Repair
The first step in repairing your credit is to obtain your credit reports and check them for accuracy. By law you’re entitled to one free credit report every 12 months from each of the three major national credit bureaus—Equifax, Experian, and TransUnion. The official website for obtaining your free credit reports is AnnualCreditReport.com.
Note that the information in your credit reports can differ from bureau to bureau. That's because some of your creditors may report to one of them but not to the others.
Once you have your credit reports in hand (or on screen) review them for errors. If they report late payments, for example, check your records to see if that's true. Check, too, for any accounts that you don't recognize. That could be a sign that someone else has opened an account in your name.
In case you discover errors, the Federal Trade Commission (FTC) outlines a dispute process you can follow.
The FTC first suggests writing to the credit bureau (or bureaus) in question. Explain which information you're disputing and attach photocopies of any documents that support your case. You can also contact individual creditors directly to contest information that they supplied to the credit bureau.
The law requires that the credit bureau investigate your claim within 30 days, unless it considers it frivolous. The bureau must also provide your letter and supporting documents to the creditor that supplied the disputed information. The creditor is required to investigate your claim and report back to the credit bureau.
When the investigation is finished, the credit bureau must report the results to you in writing. If the bureau decides in your favor, the original creditor must notify all of the credit bureaus it supplied the erroneous information to so they can correct their files. If the decision goes against you, you still have the right to provide a written explanation that will be added to your credit file.
Much of this process can be completed online, and all three of the major credit bureaus provide instructions and the relevant forms on their websites.
How to Avoid Credit Repair Scams
While legitimate credit repair companies can do what they promise, the field is rife with scam artists. The Consumer Financial Protection Bureau provides some warning signs to watch out for, such as if the company:
- Promises to remove all negative information from your credit report. Remember, no one can get accurate information deleted from your credit report, so if a company claims to be able to, that's a major red flag.
- Suggests you dispute even accurate information. Disputing information you know to be correct is tantamount to fraud.
- Pressures you to pay upfront. A legitimate credit repair company won't ask for money before it has done anything. In fact, that's illegal under the federal Credit Repair Organizations Act.
Note that if you do sign up with a credit repair company, you have the right to cancel free of charge within three days.
The Bottom Line
Legitimate credit repair companies can see to it that inaccurate information is removed from your credit reports so that it doesn't harm your credit score. However, they can't do anything for you that you couldn't do for yourself if you're willing to put in the time and effort.
Credit Report
What Is a Credit Report?
A credit report is a detailed breakdown of an individual’s credit history prepared by a credit bureau. Credit bureaus collect financial information about individuals and create credit reports based on that information, and lenders use the reports along with other details to determine loan applicants’ creditworthiness.
In the United States, there are three major credit reporting bureaus: Equifax, Experian, and TransUnion. Each of these reporting companies collects information about consumers’ personal financial details and their bill-paying habits to create a unique credit report; although most of the information is similar, there are often small differences between the three reports.
ADVISOR INSIGHT
Derek Notman, CFP®, ChFC, CLU
Intrepid Wealth Partners LLC, Madison, Wis.
Make sure to review your credit report before you need it. A client of mine was applying for a home mortgage, and when the bank pulled their credit report, there was over $20,000 of credit card debt on the report, but the client didn’t have any credit cards.
What had happened was that the client had the same name as their father, so when the credit report was run, it pulled their correct information, but also accidentally pulled their father’s credit card balance.
Make sure to check for errors before you think you will need to apply for credit so you can have them fixed if there are any. Not doing this could delay your credit decision, cause your lender to think twice about lending you credit, and ultimately delay a time-sensitive purchase.
Credit reports also list credit inquiries and details of accounts turned over to credit agencies such as information about liens and wage garnishments. Generally, credit reports retain negative information for seven years, while bankruptcy filings typically stay on credit reports for about 10 years.
How Credit Reports Work
Credit reports typically divide information into four sections.
First Section
The top of the report contains personal information about the consumer, and in many cases, this section may include variations of the consumer's name or Social Security number, simply because the information was reported incorrectly by a lender or other entity.1
Second Section
The second section comprises the bulk of most reports and includes detailed information on lines of credit, also called trade lines.
Third Section
The third section includes public records such as bankruptcies, judgments, and tax liens.
Fourth Section
The bottom of the report lists all of the entities that have recently asked to see the individual's credit report because of an event such as applying for a personal loan.
If an individual submits an application for credit, an insurance policy or rental property, creditors, insurers, landlords, and select others are legally allowed to access his credit report. Employers may also request a copy of an individual's credit report as long as the individual agrees and grants permission in writing. These entities typically must pay the credit bureaus for the report, which is how credit bureaus earn money.
The Fair Credit Reporting Act requires each of the three credit reporting bureaus to supply consumers with a free credit report once per year. Federal law also entitles consumers to receive free credit reports if any company has taken adverse action against them. This includes denial of credit, insurance, or employment as well as reports from collection agencies or judgments. However, consumers must request the report within 60 days from the date the adverse action occurred.
In addition, consumers who are on welfare, people who are unemployed and plan to look for a job within 60 days, and victims of identity theft are also entitled to a free credit report from each of the reporting agencies.
For consumers looking for ways to repair their credit, there are companies who can negotiate with your creditors and liaise with the credit agencies on your behalf. There are both reputable companies and scammers in the industry, so it's important to research firms based on their reputation and good standing to be certain you're hiring one of the best credit repair companies available.
Why You Should Get Your Credit Report
Disputing negative items
Negative items on your credit report are pretty much always bad. The good news is, if the negative item is incorrect, unfair, or unverified, you can work to fix it.
Not sure if a negative item is hurting your score?
Find out in as little as 5 minutes from our trusted sources below.
