What Is A Credit Repair Company And How Do They Work?

If your credit score is low, and you aren’t sure how to improve it, working with a good credit repair company might help. Credit repair companies help you repair your credit by disputing misreported late payments and asking credit bureaus to remove accounts that aren’t yours and fix the balances on accounts you’ve paid off.

That said, there are limitations to what these companies can do to boost your credit. You also need to be able to tell the difference between legitimate repair companies and scammers who prey on customers with bad credit. It’s crucial to understand what a credit repair company is, how to vet the company and learn what alternatives are available. 

What is a credit repair company?

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

Some companies offer debt consolidation products to help improve your credit score by combining multiple debts with one new loan at a fixed payment and interest rate.

“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.

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 you’ll spend calling, keeping track of and following up on each account with each credit bureau until it’s fixed.

How do credit repair companies work?

Most third-party credit repair companies follow the same process to help fix your credit. The company does the legwork to identify problems, explains its plan and then contacts creditors and credit bureaus until you get results. 

You’ll typically follow these steps once you get started with the process.

1. 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.
2. Mistakes are identified and creditors are contacted. 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.
3. The lender requests documentation. You may need to provide proof a bill was paid on time or that your credit card balance is paid in full. You may also need to provide identification documents to prove the account is not related to. 
4. Each mistake is corrected. 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. Because late payments and credit utilization have the most impact on your scores, fixing an incorrectly reported late payment or credit card balance could give your scores a significant boost.

However, the results will depend on your particular situation. Any company you hire can only remove actual mistakes. If something is accurate, there’s nothing you or the company can do to remove it from your report besides wait.

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. The key is to make sure you manage your credit well during the repair process. Any new late payment or maxed-out credit card could cancel out any progress you make during or after the repair process. 

How to check out credit repair companies

Bad credit is big business for credit repair fraudsters. Knowing how to separate the scams from the legitimate companies is essential to avoid paying fees to a company that does nothing to fix your credit. Or worse yet, it could steal your identity and further harm your credit score by opening new accounts. 

Luckily, the Credit Repair Organizations Act regulates what companies can say and do. You’re probably working with a reputable company if: 

• The company doesn’t make guaranteed promises. No credit repair company can predict whether your credit repair will work or not. They can give you success rates, show client testimonials and tell you how the process works. 
• You aren’t asked to commit fraud. A scam company may ask you to misrepresent your identity and finances. Do not work with such a company. Communication should be honest and transparent. 
• Everything is in writing. 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.
• You don’t pay upfront fees. Legitimate credit repairs get paid once they deliver results. Requiring payment upfront is illegal and should be reported to the Federal Trade Commission. 
• They offer money-back guarantees. If you’re really not happy with the progress on your repair, some companies offer money-back guarantees of up to 90 days. 

To find the best credit repair companies, read reviews of each company you’re considering on Trustpilot or Google and check for complaints with the Better Business Bureau. Reviewers will often share if they were treated unfairly or scammed. 

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.  The fees may vary based on what type of service you need. 

For example, companies may charge a different fee if you want to build credit, repair credit or repair and build credit. The more services you need, the higher the fee will be. 

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.  
• 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.

Alternative credit repair options

You may want to consider credit counseling or a debt consolidation loan if you don’t think a credit repair is worth it. Credit counseling is similar to credit repair, while debt consolidation loans involve replacing your existing debt with a new loan. 

How credit counseling works

 Credit counseling may be offered by nonprofit counseling agencies free of charge, or for a fee by for-profit companies. You’re paired with a credit counselor who reviews your financial situation to come up with an action plan. In some cases, you may qualify for a debt management plan (DMP) that allows the agency to negotiate your debt on your behalf, similar to how a credit report company works. 

How debt consolidation loans work

A debt consolidation loan is a personal loan used to pay off high-interest-rate debt. It can be especially useful for combining multiple credit cards and replacing them with one new loan at a fixed payment. You can pick terms ranging from one to seven years to fit your budget. 

Because it’s an installment loan, using a debt consolidation loan to pay off credit card debt could reduce your credit utilization ratio and give you credit a nice bump. The drawbacks are fees that can be as high as 12 percent of your loan amount, while bad credit APRs go as high as 35.99 percent. 

Bottom line

Repairing your credit can put you on track for a higher credit score, making it easier for you to qualify for other loans with favorable terms in the future. Using a credit repair company can make this process easier, but it also comes at a cost. 

If you’re diligent enough, you can repair your credit on your own for free, but it will require a significant time commitment and disciplined follow up. It may be worth it to seek out credit counseling before you pursue a credit repair company to get an unbiased opinion of your financial outlook first.