Credit Repair

Credit repair involves fixing your bad credit in any way, shape, or form. But when most people use the term “credit repair,” they’re referring to the process of challenging and disputing errors on credit reports.

You can go through the dispute process for free with each of the credit bureaus on your own. This involves filing a formal dispute with the credit bureau(s) in question either online or by mail.

In your formal dispute, you want to provide a detailed explanation of the error and include any supporting documentation you have along with it. Learn more about disputing errors on your credit report.

Many people don’t have the time to do their credit repair or don’t understand how to make their case. So they look into hiring a credit repair company to challenge and dispute errors on their behalf. These companies can charge a fee for their legwork—more on how that works below. There are times when the extra help is valuable. For example, if you have multiple errors across credit reports or you’ve been the victim of identity theft.

This article looks at both types of credit repair—DIY and paid—starting with credit repair businesses since there’s a good chance that’s what someone means when they use the term credit repair.

Is Credit Repair Legal?

Yes, credit repair is legal under federal law. The Fair Credit Reporting Act (FCRA), Title VI of the Consumer Credit Protection Act, protects consumers from accidental, negligent, or deliberate inclusion of inaccurate, unfair, or unsubstantiated information in credit report data provided by creditors to credit bureaus. This shields you from damage to your credit which can be caused by factors beyond your control such as typos, outdated data, malicious creditors, or identity theft. If you notice incorrect, unverified, or otherwise disputable information on your credit report, you have a legal right to contest it. You can do this yourself, or credit repair services can assist you with this process.

How Does Credit Repair Work?

Credit repair involves contacting credit bureaus and, in some cases, your creditors, to dispute inaccurate, unfair, or unsubstantiated information. In some cases involving simple corrections, you may elect to do this yourself. However, because you need to contact all three major credit bureaus if the error is on all three reports and because some disputes can involve contacting creditors as well, you may wish to seek help from a professional credit repair service, particularly for more complex disputes.

Appreciating why you might want to work with a credit repair service will be easier if you understand how credit repair works. To get to the heart of what credit repair is and how credit repair companies operate, we went to Dr. Randy Padawer, senior vice president of product with Progrexion.

“Credit repair leverages your legal right to three standards: Credit reports must be 100% accurate, entirely fair, and fully substantiated,” Padawer said. “Too many lesser credit repair companies skip over those last two standards—which involve communicating with your creditors—in favor of depending on simple credit bureau disputes by themselves.”

Customized tools, educational approaches, and proven technologies offered by credit repair companies guide you through the tasks and action items you need to take to maintain a healthy score and accomplish your credit goals.

Here’s a good example of when a reputable credit repair service can help you do something you may not be able to accomplish yourself. If you have a collection account that’s been sold to a few different debt collectors, it can appear on your credit report multiple times. That information is accurate but having that one debt dinging your credit score multiple times doesn’t meet the “fair” standard that Padawer mentioned.

Errors are more common than you might think. And if you have items on your credit report that aren’t 100% accurate, entirely fair, and fully substantiated, you want to consider credit repair—either do-it-yourself (DIY) repair or by hiring a professional.

According to the CFPB, a Federal Trade Commission (FTC) study found that 1-in-5 consumers have an error on at least one of their credit reports. You can check your credit reports for errors by getting free copies every 12 months at annualcreditreport.com.

You can also get your free Experian Vantage 3.0 credit score and a credit report card that is updated every 14 days on Credit.com. Your credit report card shows where you stand in the five key areas that make up your score—payment history, credit utilization, account mix, credit age, and inquiries. Your report card also shows you which areas need work and gives you tips on how to improve your standing in each area if needed. Checking your credit report card and credit score doesn’t hurt your credit in any way.

How Is Credit Score Calculated?

Credit scoring systems such as FICO® assign consumers or businesses a number that helps financial providers evaluate how likely borrowers are to repay debt and how much additional debt they can afford to take on. Credit scores are based on factors that reflect the history of repaying debt on time, ability to repay current debt, and capacity to manage additional debt. Major factors used to calculate consumer credit scores include:

Payment history: How often do you pay bills on time, and do you have any history of payment collections, bankruptcies, or foreclosures?
Credit utilization: How high are your account balances compared to your credit limits?
Credit age: How old are your credit accounts?
Credit mix: Do you have experience managing debt payments for a diverse range of credit products, such as credit cards, student loans, auto loans, and mortgage loans?
Credit inquiries: How often have you applied for credit recently?

Of these factors, payment history and credit utilization have the biggest impact on your credit score. In the most widely used credit scoring system, FICO, payment history counts for 35% of your score, while credit utilization counts for 30%. Credit age accounts for 15%, while credit mix and credit inquiries count for 10% each.

Note that your credit report will include a breakdown of other information about your financial history. These can include items such as a list of your revolving and installment accounts, recent hard and soft credit inquiries, and a history of collection actions and bankruptcies. Together with your credit score, these items help financial providers gain a more complete picture of your credit history.

For additional information to help you understand your credit score, see our Credit Score Guide.

What Hurts Your Credit Score?

The factors used to calculate your credit score can hurt your score when not managed properly. Some of the main factors which can lower your credit score are:

Late payments: Because FICO’s scoring system places such weight on payment history, late payments can have a big impact on lowering your credit score. Even a single late payment that goes beyond 30 days overdue potentially can harm your score. More serious late payment issues such as collection actions, bankruptcies, and foreclosures can significantly lower your score. Prioritize avoiding late payments.
Excessive credit utilization: If you carry a high balance on your credit cards, it can cause financial providers to be concerned that you’re short on cash or that you owe too much in monthly debt payments to take on new debt. Credit utilization above 30% of your balance is considered high. A rate of 10% or less is ideal.
Short credit history: If your accounts are all-new, financial providers tend to look upon your ability to manage credit as unproven. Keeping accounts open for 7 years or more can help improve your credit history.
Only one type of credit: If you’ve only handled one type of debt, such as a credit card or a student loan, lenders may not feel confident in your ability to handle other types of debt such as mortgages. You can improve your credit score by using a mix of different types of credit and keeping up with your payments.
Too many new applications: If you apply for many different credit cards or loans over a short period, it looks like you’re desperate for cash, and it may raise suspicions that you’re a higher risk because of the extra activity. Hard credit inquiries stay in your file for two years, so take this into account before going on a credit application spree.

These are some of the biggest factors which can hurt your credit score. Following the guidelines above and avoiding these issues can help you minimize the need for credit repair.

How Much Does Credit Repair Cost?

Credit repair services usually charge a monthly fee while they’re fixing your credit, and you also may need to pay a setup fee. Monthly fees can vary over what can be a period of several months to a year.

Some credit repair services may offer tiered packages with fees for additional services. For instance, some packages may offer credit score monitoring or identity theft alerts.

Why Is Credit Repair Necessary?

Credit repair is necessary because of the wide range of negative effects bad credit can have on your finances and your quality of life.

Here are some of the potential side effects of bad credit:

You may find it harder to get a loan to buy a new car or home
Bigger, well-known, reputable lenders may be reluctant to give you a loan, forcing you to turn to less preferable lenders
Qualifying for a credit card may be difficult
If you do qualify for a loan or credit card, you may have to pay a higher interest rate than you would with good credit
You may pay higher insurance premiums for home, auto, or renters’ insurance
If you apply for a job that involves handling money, your prospective employer may run a credit check, reducing your chances of getting hired
It can be harder to rent an apartment
Utility companies may run background checks and require you to pay higher deposits
Bad credit can keep you from qualifying for credit cards with better rewards programs
You may have to delay saving money and building wealth until you can repair your credit

In short, there are many undesirable side effects to bad credit and no upside. If you have bad credit, it’s in your best interests to seek credit repair.

Get Your Free Credit Score

The place to begin credit repair is to find out what your credit is and what’s bringing it down. Under the FCRA, you’re legally entitled to obtain a free credit report every 12 months from each of the major credit bureaus, ensure that all information is accurate, and fix any mistakes. Through Credit.com you can get your Experian Vantage 3.0 , credit score free every 14 days here. Monitoring your credit score and credit report regularly can help you see how your credit repair efforts are working and what you still need to fix.

What Is Credit Repair?