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Credit Repair

Updated on May 12, 2024
Article byAswathi Jayachandran
Edited byAswathi Jayachandran
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Credit Repair?

Credit Repair is the process of individuals improving their credit scores by rightfully removing inaccurate, outdated, unverifiable, and damaging information from their credit reports. For this, they usually seek the services of credit repair companies or agencies that undertake this job for a fee.

Credit Repair

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Companies offering such services fix bad credit by eliminating or dealing with negative information that is incorrect. They communicate with credit bureaus on behalf of their clients for this purpose. They help clear the adverse effects of bad credit resulting from misinterpreted data or information errors. However, they cannot request the removal of information that is negative but accurate and verifiable.

Key Takeaways

  • Credit repair companies assist in removing errors and inaccuracies from the credit report in an effort to raise an individual’s credit score. Such inaccuracies negatively impact an individual’s credit score and hinder their chances of securing credit.
  • Companies hired to repair credit cannot remove information that is negative but accurate and verifiable.
  • Identity mistakes like wrong name or location, incorrect loan account status reporting, data reporting, and certain other mistakes can be tackled through this process.
  • Credit repair businesses typically bill in one of two ways: subscription-based or Pay-per-delete.

How Does Credit Repair Work?

Credit repair companies assist in removing errors and inaccuracies from the credit report in an effort to raise an individual’s credit score. Inaccuracies in credit reports negatively impact an individual’s credit score. This may make it difficult for them to get a new loan or credit card. In addition, a low score may result in less favorable terms and conditions while applying for loans. Plus, a bad credit score results in banks and financial institutions charging a higher interest rate.

Individuals can contest mistakes in their credit reports through this endeavor. Reputable companies that undertake credit repair jobs support their clients by checking their credit reports, finding information that is negative, conducting interviews to verify the information gathered, and requesting documents from clients and other related entities to check whether any of the negative information is incorrect and can be invalidated or refuted.

The goal is to get the credit bureaus or furnishers to completely remove or amend the erroneous credit information to benefit the consumer, provided such information is verifiable. The amendable information includes identity mistakes, such as using the wrong name or location, inaccurate loan account status reporting, and data reporting mistakes. Other errors include incorrect balances or limits, such as a low limit or an incorrect current balance. Equifax, Experian, and TransUnion are the three top credit bureaus in the United States.

Credit repair businesses typically bill in one of two ways. The first type is a subscription-based one. Pay-per-delete is the second way to pay for credit repair. Pay-per-delete means that one only pays the company when they successfully remove a negative item from the report. In the end, credit repair agencies engage on the individual’s behalf with the credit bureaus or businesses that reported or supplied the individual’s credit information to the bureaus. Usually, these data providers are debt collectors or financial services providers, such as banks and credit card companies.

While individuals may choose to handle credit repair themselves, handing it to a company saves them the hassle of dealing with tedious and time-consuming tasks. Good credit scores make getting mortgages, loans, and other credit facilities easy. Credit repair tips listed on the official websites of reputable companies in the US can help individuals handle credit repair well.

Another aspect of credit repaid one must understand is that favorable or expected results are not always guaranteed. Only that negative information that can be lawfully removed or deleted will be handled by reputable credit repair companies.

Examples

Individuals primarily focus on eliminating inaccurate information that hampers their chances of securing credit. In this section, let us study a few examples to understand this.

Example #1

Suppose Jenny needed help getting her mortgage approved due to her low credit score. As the score was more adverse than her expectations, she believed there could be some mistakes. Jenny decided to hand the matter over to a credit repair company. However, they were acting shady and did not give any explanations about the repair process. They also promised to remove all negative information, even when it was verifiable, and requested some fees upfront.

They advised her to avoid contacting credit reporting companies on her own, stating that it would be illegal and make things complicated. Skeptical, Jenny decided to do some research and saw guidelines issued by the US government advising individuals to be wary of credit repair scams. She dropped the idea of hiring an external agency and decided to initiate efforts to repair her credit report on her own.

Example #2

Suppose Jane, who wanted to rectify her credit score and not fall for credit repair scams, decided to attempt it on her own. She scoured the internet and found the US government’s guidelines. She read that she could contact the credit reporting agencies online, by mail, or by phone. Credit repair letters required certain personal information to be filled in, and the disputed items or those that were inaccurate had to be mentioned.

In addition to this input, the account number and specific reasons as to why she feels the information is incorrect had to be mentioned. Her identification documents, including state ID cards, necessary bills, and bank statements, had to be submitted along with them.

This way, Jane was able to rectify mistakes on her credit report and improve her credit score.

Example #3

A June 2023 article published in the New York Times Magazine talks about the importance of repairing credit in order to secure credit facilities in the United States. It features an individual’s struggles to secure credit to start a career in music. The article highlights the mistakes individuals make that result in bad credit and explains what steps can be taken to avoid strikes on their credit reports.

It also introduces the readers to the three key credit bureaus in the United States: Equifax, Experian, and TransUnion. Furthermore, the article familiarizes the readers with concepts like lines of credit, missed payments, collections, closed accounts, and credit inquiries.

This illustrates the significance of building a good credit score. It also shows why people should make every effort to correct a bad credit score if they wish to secure credit facilities in the United States.

Credit Repair vs Debt Consolidation

Here are the key differences between credit repair and debt consolidation that one must understand to select the best suited option in their specific situation. 

  Key Points    Credit Repair  Debt Consolidation   
  MeaningIt refers to clearing inaccurate data from an individual’s credit report.Debt consolidation refers to consolidating all outstanding payments into one to make bills easier to pay off than paying them individually.  
  PurposeBy repairing credit, individuals seek to improve credit scores.  It helps individuals get out of debt. Starting the debt settlement process will likely lower credit scores; however, lowering the credit utilization ratio can help improve scores.  
  Pros  It is the best alternative if an individual genuinely believes that the problems on their credit report are not their fault.  Debt consolidation may be a great option if an individual has many bills in their name. In the short term, debt consolidation might result in lower monthly payments and manageable debt. It may improve credit scores in the long run.  
  Activity FrequencyEach adverse point removal is treated as a separate activity.Instead of dealing with many monthly bills and various rates and fees, one has to deal with one payment and one interest rate.  

Frequently Asked Questions (FAQs)

1. How do credit repair companies work?

These companies typically analyze individual credit reports to take necessary action. This includes resolving unverifiable negative items with the credit bureaus on behalf of the individual. They can also be hired to dispute inaccurate information.

2. How long does it take to repair credit?

If an individual has a major problem with their scores, it often takes one to two years to rehabilitate the credit. However, it depends on an individual’s situation. It means the more severe the situation, the longer it might take. As a result, correcting it can take a few months to several years. 

3. How much does credit repair cost?

Different costs apply, depending on the service, but they might add up to hundreds or even thousands of dollars annually. According to Forbes Advisor, credit repair companies may charge around $50-$150 per month for subscription-based services.

4. Do credit repair companies work?

Reputable credit repair companies can assist individuals in getting rid of false information on their credit reports, which usually harms their credit scores. Negative information that is true and verifiable cannot be removed. For example, late payments, wilful default, bankruptcy, etc., cannot be deleted.

This article has been a guide to what is Credit Repair. Here, we compare it with debt consolidation and explain it in detail with its examples. You may also find some useful articles here –

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