What is Credit Repair? How Do Credit Repair Companies Work?

What is Credit Repair?  

Credit repair is the process of improving your credit history that may have been hampered due to varied financial reasons. This includes removing or disputing any errors or cases of identity theft. 

Credit repair helps to improve your credit score by addressing all the factors that hamper it. You may hire a credit repair company to help you address errors and raise disputes, wherever available. However, you can also work on improving your credit score on your own without the help of any credit repair companies. 

This blog explores credit repair, how credit repair companies operate, and how to distinguish between legitimate companies and scams. 

How Does Credit Repair Work? 

Credit repair aims to identify and fix issues in your credit report. Here is a brief breakdown of how credit repair works:  

1. Get your credit reports: You must obtain credit reports from the credit bureaus (Equifax, Experian, and TransUnion). You can receive one free report from each bureau annually through AnnualCreditReport.com.  
2. Identify inaccurate entries: Assess your credit reports for any discrepancies, including errors in personal information, incorrect account statuses, and any unauthorized entries. Understand which entries affect your credit report negatively. 
3. Raise dispute: If there are any inaccuracies, you must dispute them with the credit bureaus. You can file a dispute online via mail, or phone. The bureau must address the dispute within 30 days. They will either correct the information or provide a valid reason if there is no change.
4. Negotiate with the creditors: In some cases, negative items can be negotiated with the creditors. If you have delinquent accounts, you can contact your creditors to negotiate a payment plan or request them to delete the entry once the debt is paid. These actions can significantly improve your credit report. 
5. Establish a good credit history: Building your credit history is a critical step in credit repair. You can build positive credit by managing existing debts responsibly, making payments on time, and keeping old accounts open. 
6. Maintain good credit habits: Credit repair takes a lot of time. It is not an instant quick fix. It requires consistent effort, made over time to maintain good credit habits. Pay your credit bills on time, keep your credit utilization low and avoid opening too many new accounts or getting new credit cards. 

Also Read: Step-by-Step Guide to Download CIBIL Report for Free

Common Myths About Credit Repair  

Myth: Credit Repair Improves Credit Score Instantly 

Fact: Many assume credit repair is an instant way to get a high credit score, but it takes a while to build good credit. It is quite a process between credit repair providers, creditors and credit report agencies that takes considerable time for the credit to improve.   

Myth: Credit Repair Guarantees A Good Credit Score 

Fact: The credit repair process involves reviewing the individual’s credit report for any errors and negative entries. They then dispute those entries with the creditors and credit reporting agencies. The items in dispute are removed from the credit report, which could lead to a higher credit score. But, if the creditors/ reporting agencies find the entries are valid, they will go back on the report and continue to have the same effect on the credit report. 

Myth: I Cannot Do Credit Repair On My Own 

Fact: You can do the credit repair process yourself if you have the time to do it. It also removes the middlemen as you can directly deal with creditors and credit reporting agencies yourself. You save money as well, as you don’t have to spend it on the credit repair process. 

Myth: Credit Repair Results Are Permanent 

Fact: Credit reports and scores are not permanent. They keep changing based on your credit behaviour and financial choices. To maintain a good credit history, you need to make responsible financial decisions and make timely payments. 

Also Read: How is 650 a Good Credit Score?

Steps to Repair Your Credit on Your Own  

It is entirely possible to repair credit on your own. You will require financial discipline and patience to see major improvement. Here are key things you can do to repair your own credit. 

1. Review your Credit Report: Start by getting your credit report from credit bureaus (Experian, TransUnion and Equifax). Check for any errors or inaccurate entries. It is advisable to check your credit report once every year, to spot any potential misuse. For instance, a hard inquiry you don’t recognize could indicate fraud or misuse. 
2. Dispute Inaccurate Entries: It is important to dispute any errors in your report. For instance, if you paid bills on time, but there is a late payment entry, you need to dispute that entry. Minor errors like that can lower your credit score. Check for any inaccuracies in personal information like name, address etc. and get them corrected. 
3. Clear Existing Debts/Bills: If you have not paid any existing debts or are late in making any payments, pay them immediately. Clearing these dues can help prevent further damage to your credit score and improve your financial standing. 
4. Set Up Auto-Pay: If you have EMI payments or any recurring payments, set them up on autopay. This will ensure all payments are made on time and there are no delays in any payment.   
5. Keep Credit Utilization Ratio Low: Credit utilization forms a significant part that contributes to the credit score. Aim to keep the credit utilization limit to 30% of the credit limit to maintain a good credit score. If you currently are utilizing more than 50% of your credit limit, pay down the amount, to see a noticeable boost in your credit score.
6. Avoid Applying for New Credit: When you apply for a new credit card or loan, the lender makes a hard inquiry that lowers your credit score for a short time. Only apply for a new loan if it is essential or urgent. 
7. Keep Old Accounts Open: Closing any old account can negatively impact your credit score. Even if you don’t use the account, it is a good idea to keep credit accounts open.
   

Legitimate vs. Fraudulent Credit Repair Practices  

Legitimate Credit Repair Practices 

Legitimate credit repair practices aim to improve your credit score using ethical methods. 

1. Transparency and Honesty: They are transparent about their services and fees. They don’t make unrealistic promises like “100-point increase” or “instant improvement” 
2. DIY: You may review and dispute errors on your credit report yourself. It is free and straightforward. You may also approach Nonprofits that provide free or low-cost guidance.  
3. Dispute Resolution: You can file a dispute with credit bureaus for any inaccuracies in your credit report. 
4. Affordable Services: Legitimate credit repair companies charge reasonable fees, usually on a monthly basis, with no upfront payments. 

Fraudulent Credit Repair Practices 

Fraudulent credit repair schemes often use illegal tactics and make unrealistic promises. 

1. Unrealistic Promises: If a company claims to remove accurate negative information (e.g., late payments, bankruptcy) from your credit report, they are most probably a scammer. They may make a promise to create a “new credit identity” or instantly fix bad credit. You need to understand that it takes time to build a good credit history. 
2. Upfront Payment: They may demand fees before they provide any services. If they ask to pay all the fees upfront or sign for their monthly payment plan, they are most likely a scam. 
3. Illegal Tactics: They may advise you to lie on credit applications or encourage you to create a new credit identity. Creating a new identity is illegal and the fraudster will mostly disappear once you make a payment. 
4. Lack of Transparency: They do not provide any written contract mentioning their services and fees.  
5. Creating Urgency: They use common high-pressure sales tactics by creating a sense of urgency or instilling fear to pressure you into signing up for their services. 
6. No Reviews: They have no online presence or customer reviews, or business registration that can be verified.

Signs of a Credit Repair Scam  

Credit repair scams are unfortunately common, and it’s important to recognize the warning signs to avoid falling victim to fraudulent services. 

• Ill Advice: Most scammers will advise you to avoid contact with the credit reporting agencies: TransUnion, Equifax, and Experian. This is a red flag and likely a sign of scam. 
• Upfront Payment: If the credit repair company asks for full payment of fees upfront, without even reviewing your credit report, it is likely a scam. A legitimate company will usually not request money upfront. 
• False Promises: Scammers will make big and unrealistic promises like they can remove anything from your credit report. It is important to understand that it takes time to improve credit history, and it most likely does not happen overnight. Additionally, some entries (like bankruptcy) will remain on your credit report for up to 7 years. 
• Suspicious Methods: Scam credit repair company may put false information in your credit profile. They may urge you to dispute a legitimate negative entry.   

Pros and Cons of Credit Repair Services  

Credit repair services can be a helpful tool for improving your financial health, but it’s important to understand both the benefits and potential drawbacks before deciding if they’re right for you. 

How to Choose a Credit Repair Company 

If you are in dire need of improving your credit score, you may approach a credit repair company. Here are the steps to follow while you choose a credit repair company: 

• Check Services Offered: When you look for a credit repair company, check all the services that they have to offer including error disputes, identity theft insurance and credit score tracking. 
• Compare Prices: Many credit repair companies have different pricing for the services offered. Some may ask for fees upfront and some may offer subscription plans. 
• Understand Process: Ask about their process and the timeline of the entire process. You must be aware of the average time it takes to complete the process. 
• Ask About Refund/Insurance: In case of no improvement in the credit score, check their refund policy. They may offer a money back policy or some may charge a fixed non-refundable fee upfront.
• Check Customer Reviews: Look into Google reviews or similar platforms for what other customers are saying about their services.