What is Credit Repair and How Does It Work?

Credit errors can damage your credit scores, so fixing mistakes on your credit report is important. It’s a good idea to regularly review your credit reports for mistakes, especially if your credit needs improvement.

Credit repair is something you can do on your own or you can hire a reputable credit repair company to work on your behalf. There are benefits and drawbacks to both approaches. Doing the work yourself is free, but is a time investment. If hiring a company is the route you choose, learning about credit repair scams can help you avoid being taken advantage of along the way.

Key takeaways

• Credit repair is the process of identifying and disputing errors on your credit reports.
• You can repair your own credit for free, but some people prefer to hire credit repair professionals to work on their behalf.
• It’s important to avoid credit repair scams and understand your rights under the Credit Repair Organizations Act (CROA).

How credit repair works

The credit repair process usually starts with a review of your credit reports from the three major credit bureaus: Equifax, TransUnion and Experian. As you look over your credit reports, you can search for incorrect, outdated or questionable information that might be damaging your credit scores.

Potential red flags to keep an eye out for on your credit report include:

• Late payments that you actually paid on time
• Debts that don’t belong to you (and may indicate identity theft)
• Accounts that appear multiple times on your credit report
• Incorrect account information, e.g., credit limits, payment status, date of first delinquency or account status
• Identity errors, e.g., an incorrect name, address or date of birth
• Outdated accounts

If you identify credit issues that need correction, you or a credit repair service can file disputes with the appropriate credit bureaus. It’s also possible to submit disputes directly to creditors.

According to the Fair Credit Reporting Act (FCRA), the credit bureaus must update or remove any “inaccurate, incomplete or unverifiable information” from your credit report. And that typically has to happen within 30 days from when you submit your dispute (sometimes 45 days). In some cases, when a credit bureau removes an error from your credit report or updates your information, it could have a positive impact on your credit score.

How to repair your credit yourself

If you want to repair your own credit:

1. Check your credit reports

Visit AnnualCreditReport.com to download free copies of your credit reports from all three major credit bureaus, which you can do once a week. Be sure to review your reports for any potential signs of credit errors or fraud.

2. Dispute mistakes

Submit disputes to report inaccurate or fraudulent information on your credit report. You can file credit disputes online or send them to the appropriate credit bureau via postal mail (certified with return receipt requested is best). If you have supporting documentation to back up your claims, include it with your dispute to improve your odds of a successful investigation.

3. Pay on time

Payment history is the most important factor in your credit score — worth 35% of your FICO Score and 41% of your VantageScore credit score. Paying on time won’t technically repair your credit, but it can help you avoid new credit score damage that could set back your hard work.

4. Pay down existing debts

If your goal is to raise your credit scores, lowering your credit utilization ratio by paying down the balances on your revolving credit accounts is a good strategy. Plus, reducing credit card debt has the added advantage of saving you money in interest charges.

5. Limit new credit inquiries

Too many new hard credit inquiries in a short period of time could hurt your credit score. So, while you don’t need to be afraid to apply for new credit accounts in a responsible manner, it’s important to avoid letting lenders or credit card companies check your credit report excessively.

6. Monitor your progress

Track changes in your credit score with a free tool like LendingTree Spring. Monitoring your credit can help keep you motivated during the credit repair process and may alert you if any new negative information appears on your credit report.

How credit repair companies work

Credit repair companies offer to manage the credit repair process on your behalf. Essentially, you’re hiring a third party to perform a service that you prefer not to do by yourself. It’s a bit like hiring a mechanic, hair stylist, house cleaner or any other service provider.

Typically, a credit repair company starts by getting copies of your credit reports. Next, they identify potential issues and dispute errors with the credit bureaus (and possibly creditors as well) on your behalf. Many companies will follow up with additional disputes if the first attempt is unsuccessful. And some credit repair companies may offer debt validation or creditor negotiation services as well.

Of course, credit repair companies charge fees for their services. Costs vary, but many companies charge a setup fee (often $70 to $200) and a monthly service fee ranging from $50 to $150.

It’s also important to understand that some companies limit the number of disputes they send to the credit bureaus on your behalf per billing period. The purpose of limited disputes is to slow down the dispute process and extend the number of months a client remains in the credit repair program, paying a monthly fee. If you work with a credit repair company, it’s wise to find one that offers unlimited disputes.

It’s also important to manage your expectations. Whether you hire a credit repair company or send credit disputes yourself, there is no guarantee that accurate, negative information will be removed from your credit report right away. The credit bureaus can leave most negative items on your credit report for up to seven years (10 years for certain bankruptcies) unless there’s an error.

How to avoid credit repair scams

If you’re thinking about working with a credit repair company, watch out for any of the following potential red flags that could indicate a scam.

• Promises to remove accurate information from your credit report
• Demands for upfront payment before completing services
• No written contract
• A contract that doesn’t include a cancellation policy
• Any claims of helping you create a “new credit identity”
• Encouraging you to lie (like making false claims that you’re a victim of identity theft)

The Credit Repair Organizations Act (CROA) protects consumers from credit repair scams. This federal law requires credit repair companies to disclose your legal rights, explain the services they will provide upfront and give you the option to cancel your services within three days without penalty.

How to find a legitimate credit repair company

If you decide to hire a credit repair company, it’s important to do your research to make sure you find a trustworthy solution. Below are some tips to help you get started.

• Ask for referrals from trusted financial professionals. If you’re working with a loan officer, fiduciary or another financial professional, consider asking for recommendations.
• Research companies online. Whether you receive a referral or find a credit repair company online, do some basic research. See if the company has any history of regulatory violations or federal lawsuits by searching government websites like the FTC and CFPB. You can also check for complaints on the CFPB complaint database.
• Make sure the company adheres to CROA. Any legitimate credit repair company will follow CROA guidelines including providing contracts, offering customers the right to cancel, not requiring advance payment without services and not presenting misleading information.

It’s also important to shop around and compare services from multiple credit repair companies before you make a decision. You’ll want to avoid any company that uses high-pressure tactics or that charges fees that are too expensive for your budget.

Alternatives to credit repair

Both DIY credit repair and credit repair companies can only help in certain situations. In many cases, other strategies may be a better fit, especially if your low credit score is due to high debt, missed payments or other accurate but negative credit information that is going to remain on your credit reports for the foreseeable future.

In these situations, you may want to consider some of the following alternatives to credit repair.

• Debt consolidation: Combining high-interest debts into a single, lower-rate debt consolidation loan or balance transfer credit card with a promotional interest rate can simplify repayment and reduce interest, potentially benefiting your credit in certain situations. This debt strategy can make monthly payments more manageable and help improve your credit over time with responsible repayment habits. But you typically need good credit to qualify for a competitive interest rate.
• Debt settlement: You may be able to negotiate with creditors to pay less than you owe on credit obligations. While this strategy can relieve financial pressure, it may also have a negative impact on your credit score and have potential tax implications. There’s also no guarantee creditors will accept debt settlement offers.
• Bankruptcy: This is typically a last-resort legal option to consider if you can’t repay your debts. Bankruptcy can provide a financial fresh start. But it may remain on your credit reports for up to 10 years, and the credit score impact can be significant.
• Waiting it out: Negative items fall off your credit report over time (seven to 10 years in most cases). While you’re waiting for this to happen, you can focus on building credit with positive habits like on-time payments and keeping balances low on your credit cards.