What are credit repair companies and how do they work?

If you have low credit and aren’t sure how to grow your score, working with a good credit repair company might help. Credit repair companies help you repair your credit by disputing false negative claims on your credit report.

That said, there are limitations to what these companies can do to boost your credit. The credit repair industry also has plenty of scams and bad actors. It’s crucial to understand what a credit repair company can do and know how to vet the company properly.

What is a credit repair company?

Credit repair companies help consumers improve their credit scores in exchange for a fee. They do this by finding mistakes on your credit report and disputing them with the three major credit bureaus — Experian, Equifax and TransUnion — to get them removed.

These companies can’t do anything you can’t do yourself for free — you can take steps to clean up your credit report on your own. However, working with one can be beneficial if you lack the time.

“Think of a credit repair company like you’d think of a tax preparer. Sure, you can do your own income taxes, but sometimes it’s worth the money to hire a professional,” says Howard Dvorkin, CPA and chairman of Debt.com.

Sometimes these companies offer ways to improve your credit, like debt consolidation products to help improve your credit score and make your debt more manageable.

You can also seek debt consolidation loans on your own. Be mindful that these are unsecured loans and lenders will rely on your credit profile to determine your interest rates. If you do decide to go this route, you may end up with a high interest rate until you improve your credit and refinance the loan.

How to verify credit repair companies

Some scams will pretend to be credit repair companies, often guaranteeing results without even looking at your situation. 

Luckily, the Credit Repair Organizations Act regulates what companies can say and do. Knowing the law helps you spot red flags, like these: 

• A scam company may ask you to misrepresent your identity and finances or may try to dodge questions. Do not work with such a company. Communication should be honest and transparent. 
• The law requires that you receive a contract in writing explaining the costs and services to be provided. Avoid companies that try to dodge this step.
• Requiring payment upfront — before you see any results — is a sign of a scam. Report this illegal activity to the Federal Trade Commission. 
• Finally, companies must not promise impossible results. They cannot remove accurate negative marks from your credit report or guarantee your credit will increase to a specific level. If they claim they can, look elsewhere.

Read reviews through the Better Business Bureau, Trustpilot and Google. Reviewers through these sites will often state if they had trouble or were outright scammed. 

How do credit repair companies work?

Whether you hire a third party to repair your credit or DIY instead, the process will look the same. The main difference is that a credit repair company does the legwork for you with the first option.

First, the company will request a copy of your credit reports from the three major credit bureaus. Then it will do an in-depth analysis to spot any potential mistakes. These can range from accounts that don’t belong to you to incorrect balances or old negative marks that shouldn’t be showing up anymore.

Once the company identifies these mistakes, it proceeds to dispute them with the credit bureaus or organizations that reported the inaccuracies. It does this by sending letters, emails and making phone calls on your behalf.

The end goal is to get these items removed from your credit report. It’s also worth noting that this process must be repeated for each mistake on your report, which can be time-consuming.

How does credit repair help your credit score?

Credit repair can boost your credit by removing inaccurate negative information from your report. However, the results will depend on your particular situation.

Any company you hire can only remove actual mistakes, the same as you. If something is accurate, there’s nothing you or the company can do to remove it from your report.

How long does credit repair take?

The time it takes to repair your credit depends on the extent of damage. If your credit history is mostly good, getting a few incorrect items removed from your report could take a couple of months. 

But, if you have a generally poor credit history, you will need to do more than remove a few inaccurate items from your report to improve your credit. In this case, repairing credit will require changing your spending habits and the ways you manage your debt.

Making timely payments on any debt you have and diversifying your types of credit utilization will help improve your credit over time. Paying down your debt will also help get your debt-to-income ratio in better shape. This can take as long as a few years to have an effect on your credit, depending on the state your credit score is in at the start. 

How much does credit repair cost? 

Credit repair tends to be billed monthly, since repairing credit may be a months-long process.  Many companies charge between $50 to $150 per month. According to Experian, some will also charge a “setup fee” of up to $200 — an apparent loophole in the “no upfront fees” rule. 

You’ll often pay based on which services you want, such as identity theft insurance or handling challenges and disputes with credit bureaus. 

Whether this is worth it depends on how much you are willing to do yourself to repair your credit and how much assistance you feel comfortable taking. Poor credit can result in higher rates when you apply for credit, costing up to thousands more in interest over the life of your loans. 

For instance, if you took out a $10,000 personal loan for five years at a 7 percent interest rate, you’d be paying about $1,880 in interest. With a 12 percent interest rate, that amount goes up to about $3,347. 

With that in mind, a few hundred dollars might not seem like such a massive expense comparatively. But keep in mind you don’t absolutely need these companies to improve your credit.    

Ways to improve your credit on your own

There are a few ways to boost your credit without having to use credit repair companies:

• It’s easy and free to access your credit reports. You can get weekly reports through AnnualCreditReport.com. You may also be able to access your credit score for free through your credit card company.
• Review your reports and dispute any errors by filing a dispute with the respective reporting bureau. 
• Build good habits, like paying accounts on time, keeping your credit utilization rate low, keeping paid-off accounts open and not taking out more credit than necessary.
• You can also establish new credit by opening new accounts, being an authorized user on someone’s credit card, getting a credit builder loan or starting an account with a cosigner. 
• Credit counseling is an alternative way to access assistance. Look for counselors through the National Foundation for Credit Counseling.  

The bottom line

Repairing your credit can push your credit score in the right direction, making it easier for you to qualify for a loan or credit card with favorable terms, among other things. Using a credit repair company can make this process easier, but it also comes at a cost. Also, remember that fake credit repair companies are a common scam. Understand what companies can and can’t do to determine if it’s worthwhile or if you’d be better off with a different approach.