Have you ever wondered whether you should hire a "credit repair" service? These companies promise to take steps to fix the problems on your credit report that are hurting your credit score. Although these services claim that you'll need to pay a specialist upwards of $100 per month to help get your financial situation back on track, we're here to tell you that this is almost certainly a waste of your money.
If you think to yourself, "there's got to be a better way," the good news is — there is. With a little time and effort, you can turn around your bad credit and get on the road to improving your scores for a brighter financial future.
Although credit repair companies may promise that they alone hold the key to a better credit score, the truth is it's entirely possible to repair your own credit without paying them a cent. The Federal Trade Commission (FTC) says, "Some people hire a company to investigate for them, but anything a credit repair company can do legally, you can do for yourself at little or no cost." In fact, so many dishonest companies try to lead consumers to believe that they have to hire a third party to fix bad credit scores that the Credit Repair Organizations Act (CROA) was enacted. This legislation prohibits misleading statements and requires that credit repair organizations tell customers they have the right once every 12 months to order a free copy of their credit reports and dispute any inaccurate information contained in those reports.
When you're faced with a low or bad credit score, it's imperative that you understand why your rating is subprime (550-620) or poor (300-549). So, reviewing your credit report at least once a year from all three credit bureaus (Experian, Equifax and TransUnion) is crucial.
The top reasons for low credit scores include consistently late or missed payments or other major financial issues such as bankruptcy, foreclosure or an unpaid tax lien. There are other red flags, too, including a track record of opening a lot of credit card accounts in a short amount of time, using cards for cash advances and accounts in collection (which you may not even be aware of). Keep an eye out for anything that indicates to potential lenders that you're a credit risk.
But there also may be errors that are dragging down your credit score. The FTC reports that approximately one in four people identify likely mistakes on their credit reports that lead to lower scores.
The Fair Credit Reporting Act ensures your right to dispute errors on your credit reportby contacting credit bureaus directly to fix any errors or incomplete information. The Federal Trade Commission has recommendations on how you can dispute anything on your report you believe to be unverifiable, incomplete or inaccurate. This might include accounts you didn't open or aren't yours, payments incorrectly tagged as late, etc. The FTC also has sample letters you can use to dispute erroneous entries. You can also try to dispute information on your credit report with the institution that put it there in the first place, such as a bank or other creditor or lender.
Why pay a credit repair company high fees to do this for you when it's relatively simple to do it yourself?
The biggest contributing factor to your credit score (35%) is your payment history, so if you're serious about credit repair, paying down your debt is crucial. Start with those accounts that are late but not yet considered a charge-off (with a past-due balance of 180 days), as once they hit that limit, your score will suffer a steep drop. Talk to the creditor or lender, and make a plan to avoid charge-off. Instead of using your money to pay a credit repair agency, put it towards paying off this debt.
One of the other key contributors to your credit score is your credit utilization ratio (30%), which measures your available credit vs. used credit. Even if a credit card with a high balance isn't yet delinquent, it's still impacting your credit score and serving as a warning signal to potential lenders that you may already owe more than you can afford to pay back. Again, it's a better move to use your money to reduce your balances than to pay an agency promising you the "easy way" out.
After you've gotten on track with paying off those debts that haven't yet been written off, it's time to tackle those charge-offs and accounts in collection. While neither will come off your account completely for seven years from the original delinquency date, paying off a charge-off or account in collection in full will help you show potential new creditors that you are working your way out of debt and into becoming a lower credit risk.
There's even a slight possibility that you could negotiate with the lender or creditor. They might be willing to remove the negative information from your credit report in exchange for payment. That could be worth exploring if you have the funds to do so.
Be sure that you're making the most of all ways to boost your credit score without going further into debt, such as getting your rent payments and other monthly payments (i.e. utilities) included as tradelines on your credit reports. While this isn't a magic pill that will instantaneously improve your credit score, documenting the good habits you already have will add up over time by demonstrating that you can be fiscally responsible. Unlike wasting hundreds on questionable credit repair services, investing a few dollars a month to proactively report positive information to credit bureaus is a small investment that can have a huge effect.
As is the case with charge-offs and accounts in collection, most negative information on your credit report will only be there for seven years, with a few exceptions like Chapter 7 bankruptcy and unpaid tax liens, which stay on your credit report for 10 years. If you have a negative tradeline on your credit report that's nearing that seven year mark, you should prioritize paying off other debts first. Regardless of whether you pay it off, it's only going to remain on your credit report for a short time… and it might not be worth the effort to pay it down at that late date.
Credit repair is an ongoing process, and as you can tell from all of the steps we've described. You should be hesitant to trust anyone who tells you otherwise.
Depending on how many negative markers are on your credit report and how low your credit score is, it may take a while. If you're wondering why so many companies are in the credit repair business, it's because that monthly fee of as much as $100 often goes on for many months or even years.
Start by finding the biggest problem spots on your credit report first, then you'll be ready to negotiate with creditors and dispute erroneous charges from there. There are no quick fixes, but go ahead and give yourself some credit — you can do this just as well or even better than a credit repair "specialist" can.