How Do Credit Repair Companies Work?
A reputable credit repair company helps you understand your credit report and provides guidance on how to improve your credit score. They may also assist in disputing inaccuracies on your report with credit bureaus and provide educational resources to help you manage your finances responsibly.
Your credit score doesn’t say anything about your worth, but it can affect your ability to qualify for loans, credit cards, and lines of credit. Additionally, many insurance companies use your credit score to determine how much to charge you for home or auto coverage. If your score is lower than you’d like, you may even have a difficult time qualifying for a rental home.
Fortunately, a few mistakes won’t damage your credit forever. In most cases, damaging information falls off within seven years. If you want to address the errors on your credit report sooner, you can challenge them yourself or work with a credit repair service.
How do credit repair companies work? Learn more about credit repair, how it works, and why it’s helpful.
What Is Credit Repair?
Credit repair is when you hire a company to help you remove inaccurate information from your credit report. According to the Consumer Financial Protection Bureau, about 20% of Americans have at least one error on their credit reports.
These are some of the most common errors:
- Personal information: It’s common for credit reports to contain inaccurate names, addresses, and telephone numbers.
- Account errors: If someone steals your identity, your credit report may list accounts you never opened. Creditors may also make errors when reporting payment dates and payment amounts. You may even see the same debt listed more than once.
- Balance errors: A creditor may report the wrong balance or the wrong credit limit, which affects your credit utilization ratio. Utilization measures how much revolving debt (typically this is credit card debt) you have compared to your total credit limit. Balance and credit limit errors may artificially inflate your utilization ratio, making it more difficult to qualify for loans and credit cards.
- Errors in data management: If a credit bureau corrects some of the information on your account, there’s nothing to prevent a creditor from making the mistake a second time. Therefore, you may see the same errors more than once. It’s also possible for the same account to be listed under two different creditors.
What Types of Inaccuracies Can Credit Repair Address?
Credit repair can help you improve your financial situation by addressing these errors on your reports:
- Fraudulent accounts
- On-time payments marked late by mistake
- Bankruptcies and foreclosures that aren’t yours
- Incorrect balances
- Incorrect credit limits
- Duplicate accounts
- Hard inquiries you didn’t authorize
- Closed accounts reported as open
- Open accounts reported as closed
- Incorrect personal details
- Missing accounts that might help your score
How Can Credit Repair Help You Improve Your Financial Situation?
To truly understand the positive effects of credit repair, you need to know what goes into your credit scores. FICO® bases its scores on five factors:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
Removing errors from your credit reports may have a positive impact on these factors. Here are a few examples.
Payment History
If you’ve paid all your bills on time and still have a late payment on one of your reports, removing that late payment improves your payment history. Since payment history is the most important factor in FICO’s scoring model, removing just one late payment may have a significant effect on your score.
Amounts Owed
Remember, your credit utilization ratio is the amount of revolving debt you have compared to your total credit limit. For example, if you have $10,000 in revolving debt and credit limits totaling $50,000, you have a ratio of 20%.
Now imagine what would happen if a creditor added the wrong balance to one of your reports. For example, if an error caused your balance to increase to $20,000, your utilization would soar to 40%. Addressing incorrect balances ensures your utilization ratio is correct.
Length of Credit History
In calculating your scores, FICO looks at the average age of your open accounts. For example, if you have accounts that are two years old, five years old, and 10 years old, your average age of accounts is 5.7 years.
FICO also considers the overall age of your credit history. If one of your open accounts is reported as closed by mistake, it can affect your average age of accounts and the length of your credit history, reducing your score. Credit repair gives you a chance to address this type of error.
Credit Mix
Credit mix refers to the different types of credit accounts you have. For example, you may have three credit cards, an auto loan, and a mortgage. If your auto loan is missing from your credit report, it won’t count toward your credit mix, which could have an impact on your score. Therefore, it’s important to address missing accounts during the credit repair process.
New Credit
Every time you apply for a new account, the creditor does a hard inquiry. This involves pulling a copy of your credit report to determine if you meet the lending requirements. Each inquiry can stay on your report for up to two years, although their impact decreases significantly after about a year.
Too many inquiries make lenders nervous, as they might indicate you can’t meet your financial obligations. Therefore, if a creditor puts an inquiry on your report when you haven’t applied for a new account, it could hurt your scores. Credit repair gives you a chance to get this incorrect data removed.
Steps Involved in Credit Repair
Credit repair typically includes the following steps.
1. Request Copies of Your Credit Reports
The first step is to get copies of your credit reports. By law, you’re entitled to one free report from each of the three major credit bureaus yearly from AnnualCreditReport.com.
Due to high levels of fraud during the COVID-19 pandemic, AnnualCreditReport.com started offering free weekly reports. As of February 2024, that has yet to change, making it easier than ever to review your credit history. You can also subscribe to ExtraCredit® to access additional benefits while keeping an eye on your credit.
2. Review Each Credit Report Carefully
Once you have your reports, review each one carefully. Make note of any inaccuracies, such as incorrect balances, open accounts marked as closed, or hard inquiries you didn’t authorize.
3. Dispute Inaccurate Items
Now it’s time to challenge the inaccurate items you found. To challenge an error, write a dispute letter to the credit bureau. Include the following information:
- A copy of your credit report with the error circled
- An explanation of why the item is incorrect
- Additional information to support your dispute
If there are multiple errors in the same report, send a separate dispute letter for each one. Describing multiple errors in one letter may lead to confusion and delays. Managing multiple disputes is a little complicated, which is why many people prefer to work with a credit repair company instead of doing it themselves.
4. Follow Up When Necessary
Credit bureaus typically have 30 to 45 days to investigate disputes once they receive them. If the reporting organization can’t validate the information reported within that timeframe, the credit bureau must update your report.
To make sure credit bureaus are following the law, you may need to pull your reports again within 60 to 90 days of filing your disputes. Keep an eye on your mailbox in case one of the credit bureaus sends you a letter requesting more information.
How Do Credit Repair Companies Work?
Credit repair services take the guesswork out of removing inaccurate items from your credit reports. For example, Lexington Law Firm works with you to identify inaccuracies. Then submit disputes on your behalf and monitor the status of each dispute.
When you work with a credit repair service, you don’t have to worry about writing dispute letters on your own or following up with the credit bureaus.
How Much Does Credit Repair Cost?
Repairing your credit on your own is free, but not everyone has time to write dispute letters and follow up on them regularly. CreditRepair.com, one credit repair service you may want to consider, has several service levels, but the most popular option costs $119.95 per month.
Avoiding Credit Repair Scams
The Credit Report Organizations Act governs the marketing of credit repair services. Under the CROA, a credit repair company may not make misleading statements or request payment before any services have been completed.
Watch out for companies that promise to boost your score overnight or guarantee your scores will improve. It’s also a red flag if a company promises to remove accurate information from your credit reports. Avoid scams by vetting each company carefully and asking plenty of questions.
Start Repairing Your Credit Today
If you don’t have time to repair your own credit or you find the process confusing, a credit repair company may be able to help. Or, you can start by learning more about your credit health at Credit.com.
Disclaimer: Credit.com and CreditRepair.com are both owned by, Credit.com Holdings, LLC. Oquirrh Mountain Law Group, PC, d/b/a Lexington Law Firm is an independent law firm that uses Credit.com Holdings, LLC as a provider of business and administrative services.
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