Different credit repair options: How they work and how to choose

Key takeaways

  • Credit repair is a term used to describe the process of restoring your credit rating.

  • You can hire a credit repair company to do the legwork for you or repair your credit on your own.

  • To do your own credit repair, you’ll need to get copies of your credit reports and dispute any errors with the credit bureaus.

Exploring credit repair options can be a smart step if you believe your credit score is being brought down by incorrect information. The process involves addressing errors and outdated information with the main three credit bureaus. You can handle this yourself or work with a credit repair company.

However, if your credit score is low due to past financial troubles and missteps, credit counseling might help you see long-term improvement.

1. Credit repair companies

Credit repair companies handle the back-end work for you, often in exchange for a fee.

How credit repair companies work

The company starts by getting copies of your credit reports from the major credit bureaus. Next, it identifies negative entries that could be lowering your score.

If any of these items are reported in error or are past the reporting timeline, the credit repair company will file disputes with the credit bureaus on your behalf. The credit reporting agencies have 30 days to respond to the dispute, or the items in question must be removed.

What to watch out for

Scammers prey on people desperate to fix their credit. Choose your credit repair company with care. The Consumer Financial Protection Bureau (CFPB) identifies the following as red flags to be aware of.

  • Demands upfront payment: It’s illegal for credit repair companies to request payment before services are rendered.

  • Guarantees removal of credit information: You may want to check twice if a company promises to erase negative marks on your credit report. Correct and timely information — even if disputed — can’t legally be removed by a credit repair company.

  • Discourages contact with credit bureaus: Shady credit repair companies suggest avoiding contact with credit reporting agencies during the dispute process.

  • Fails to disclose your rights: Credit repair companies must explain your rights as a client and the fact you can handle the dispute process independently.

  • Refuses timely cancellation requests: When working with a new company, you have up to three business days to cancel your contract without incurring fees.

When to use a credit repair company

Under the Fair Credit Reporting Act, you have the power to handle the credit repair process on your own. But if you’re strapped for time or would prefer to let a reputable company do the work for you, hiring a credit repair company could be worth the cost.

2. DIY credit repair

If you have the time and are fairly familiar with the process, DIY credit repair may be the best option for your wallet. DIY-ing your credit repair means you won’t be responsible for paying any fees, which can come with other repair methods.

Under federal law, consumers can take their credit health into their own hands. In fact, the Federal Trade Commission (FTC) states that “anything a credit repair company can do legally, you can do for yourself at little or no cost.”

However, this isn’t the best option for everyone. Before moving forward, you’ll want to organize and explore credit repair resources.

How to repair your credit yourself

Repairing your credit is a time-consuming and involved commitment. But with dedication and education, you can repair your score without outside agencies or companies. Consider these five steps to maximize your potential credit repair results.

  1. Get copies of your credit reports: Visit AnnualCreditReport.com to retrieve your credit reports from Experian, TransUnion and Equifax. You can check your credit reports through this site for free every week.

  2. Review your credit reports: Look for errors and outdated information that should be corrected or omitted from your credit profiles. Search your financial records for receipts and other documents to back your version of events.

  3. File disputes with the credit bureaus and await results: You can file disputes by mail, phone call or the company’s online portal. The credit bureaus have 30 days to respond to your dispute or remove the negative mark. The item will either be removed from your report, or they’ll update your profile to reflect the current account data.

  4. Adopt healthy financial habits: While waiting for the bureau to respond to your dispute, be sure to pay all your bills on time to avoid adverse credit reporting. It’s equally important to start reducing your active debt to improve your credit utilization ratio.

3. Credit counseling

The above options are not a good fit if your credit score is low for legitimate reasons, like payments you truly did miss or you using all your available credit. Credit repair companies won’t be able to get legitimate derogatory marks removed from your credit report.

Credit counseling helps you create a plan to address your habits and debts. Fixing your finances may take longer than the 30 days it takes to remove mistakes from your credit report. But in the long run, it will benefit not just your credit score but also your budget.

Credit counseling is offered by nonprofit credit counseling agencies, often free of charge, and by for-profit companies. Any fee charged by a nonprofit agency will likely be less than you would pay working with a debt relief company.

How credit counseling works

If you decide to go this route, you’ll be partnered with a credit counselor. During your first meeting, you share your financial information so your counselor can tailor an action plan based specifically on your financial health. For example, they might suggest combining high-interest debt with a debt consolidation loan.

Alternatively, the counselor may suggest a debt management plan (DMP). If you sign up for a DMP, the agency will likely negotiate with your creditors and lenders to secure lower monthly payments you can afford. If your debts are successfully negotiated, you may need to pay a fee to the agency consisting of a small percentage of any discharged debt.

What to watch out for

Not all credit counseling agencies are reputable. When exploring your options, ask the agency about its licensure status. Be sure to check with the attorney general’s office in your state to confirm the agency is licensed to operate in your state. Also, check for the grade and status with the Better Business Bureau and TrustPilot. A poor rating or several reviews with similar complaints could indicate a poor reputation.

It’s equally important to avoid for-profit entities that charge hefty service fees. This could be a sign of a debt settlement company disguised as a credit counseling agency.

While debt settlement companies can offer credit counseling, their employees are incentivized to sell you additional services. Debt settlement often comes with hefty fees and, in certain cases, can result in more debt and credit damage than when you started.

When to use credit counseling

While you can self-research ways to budget and pay down debts, it may help to have someone provide guidance. Credit counseling may be a good option for a personalized plan tailored to your finances.

The bottom line

If you are in a precarious financial situation and want to improve your credit, you have a few options. A credit repair company handles the heavy lifting for you. Credit counselors can help address the root of the problem. DIY repair takes time but costs next to nothing.

No matter the route you choose, just remember there is no reset button for your credit history. It is important to explore credit repair options with extra care.