Bad credit can make life hell. You often need a good credit score to rent an apartment, get a cellphone and perform other basic life tasks. So when your score is in the dumps, it’s easy to become desperate.
That desperation can lead to bad decisions, like forking over hard earned cash to a shady credit repair company. While there are some legitimate credit repair services, not all put your best interests first.
So, before you turn to a credit repair company to fix your lousy credit, be sure you’re working with the right one first.
What credit repair companies do
A credit repair company works with your creditors and the credit bureaus to get negative items removed from your credit reports. By cleaning up your reports, your credit score will improve.
Credit repair companies often accomplish this by disputing credit report errors with the credit bureaus on your behalf. They also may try to negotiate a “pay to delete” arrangement with individual creditors or collectors, which involves you paying the balance of a debt or an agreed settlement amount in return for the account trade line being deleted from your reports.
Of course, these services come at a cost, which can be anything from a set fee per negative item removed to an ongoing monthly fee for as long as you employ the firm. Usually, you can expect to spend about $100 per month.
It’s important to point out that credit repair companies don’t do anything that you can’t do yourself for little to no cost. That said, some people don’t have the negotiating skills or the time to sit on the phone for hours every day. Just like you might pay to have your lawn mowed or oil changed, some people would rather pay a service to repair their credit rather than spend the time to do it themselves.
Unfortunately, not all credit repair companies operate lawfully. Last year, consumers submitted about 1,000 complaints to the Consumer Financial Protection Bureau about credit repair companies. Some don’t deliver on all their promises, according to the complaints, while others simply take the money and run. So, if you decide to work with a credit repair company, you want to be sure it’s legitimate.
How to find a legit credit repair company
Because people who go looking for help fixing their credit tend to be in a highly vulnerable situation, and access to information (at least, before the internet) has been fairly one-sided, the government put in place laws to protect consumers from shady credit repair practices, explained Don Petersen, a consumer rights lawyer.
Credit repair companies are regulated by the Credit Repair Organizations Act, which outlines several rules they must follow, including:
- Notify you that you have the right get copies of your credit reports and dispute inaccurate information on your own.
- Provide a detailed description of the services they will provide and how long it’ll take.
- Lay out the payment terms clearly.
- Note any guarantees.
- Request payment only after the services have been provided.
Any credit repair company you work with should do all the things outlined above. If not, they aren’t operating lawfully and are likely running a scam. Additionally, you can take a few extra steps to check if a credit repair company is legitimate, according to Dana Marineau, vice president of brand, creative and communications at Credit Karma:
Steer clear of these credit repair red flags
In general, the key is to use extreme caution when working with a credit repair company and go with your gut, Marineau said, adding: “Steer clear of companies that seem too good to be true.” If a credit repair service does any of the following, it’s a red flag and likely a sign of a scam:
1. Promise to remove negative ― but accurate ― information from your reports: While you have the legal right to get inaccurate information removed from your credit reports, the credit bureaus are under no obligation to remove negative information that’s true. So, if you have an account in collections, for example, and the amount due and payment status are correct, a credit repair company can’t legally guarantee it will be removed. In fact, it most likely won’t be.
2. Offer to create a new credit identity for you: One strategy that fraudulent credit repair companies will use is called “file segregation,” which involves applying for a new Employer Identification Number and using it in place of your Social Security number on new credit applications. This essentially creates a new credit identity for you, promising a clean slate. The only problem is, it’s illegal and doesn’t work in the long run.
3. Provide cookie-cutter service: If you sign on to work with a credit repair service but no one ever obtains your information or counsels you, you should go elsewhere, according to Petersen. “Real credit repair requires a professional to interview you and review your documents to become familiar with your situation,” Petersen said. Fraudulent companies, on the other hand, will mail out templated letters to your creditors that may not even accurately represent your situation.
4. Demand you pay up front: The Credit Repair Organizations Act prohibits credit repair companies from collecting any money from you until they’ve come through on all the services outlined in your contract. If a company asks for any money up front, run.
If you are the victim of fraudulent credit repair services or the company doesn’t deliver all of what’s promised, the Federal Trade Commission outlines a few options. Start by reporting credit repair fraud to your local consumer affairs office or to your state attorney general. You should also file a complaint with the FTC, which can take action against a company once a pattern of potential fraud becomes apparent.
You may also want to take legal action. One option is to sue the company in federal court for any losses you incurred. You can also seek punitive damages or even join a class-action lawsuit.
Is paying for credit repair services ever worth it?
There are definitely pros and cons to paying for credit repair, depending on your circumstances. “The pro for some is that the credit repair companies will do the heavy lifting for you,” Marineau said. “They will review your credit reports for derogatory marks, like charge-offs and bankruptcies. Then, they will set a plan for disputing errors and negotiating with creditors to remove those items.”
The major downside is definitely the cost, since you could theoretically accomplish these things on your own for free.
“The only benefit I’ve seen consumers receive from [credit repair companies] is that they have enough experience to know which debt collectors will accept ‘pay to delete’ deals and live up to them,” Petersen said.
In fact, according to Petersen, DIY credit repair is really the way to go in most cases. “Legitimate credit repair is not only something consumers can do on their own, they should,” he said.
If you do decide to go the DIY route, here are some steps you can take to improve your credit score.
Dispute credit report errors: The first thing you should do is request copies of your credit reports and review them for incorrect or outdated information. You’re entitled to a free report from each of the three major bureaus once per year for free at freeannualcreditreport.com.
Seek credit counseling: If you need hands-on help getting your debt under control and coming up with a plan to repair your credit, look up local consumer credit counseling services. Certified credit counselors are verified by the National Foundation for Credit Counseling, a nonprofit organization. Credit counselors can help you come up with a customized plan and even negotiate with your creditors if you’ve fallen behind on payments. These services are often free or require a small fee.