How do credit repair companies work?
In a Nutshell
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If you have poor credit, you may be struggling to qualify for a credit card, rent an apartment or even get a personal loan. To help make you a better applicant, credit repair companies often promise to improve your credit — in return for a fee.
“It’s not difficult to do most of these things on your own,” says Bruce McClary, vice president of communications at the National Foundation for Credit Counseling. “You have to weigh the cost benefit of paying someone else to do those things for you, versus doing those things on your own — and what your time is worth.”
What is a credit repair company?
Credit repair organizations are different from credit counseling agencies, which are typically a free resource from nonprofit financial education organizations that review your finances, debt and credit reports with the goal of teaching you to improve and manage your financial situation.
According to the Federal Trade Commission, the credit repair industry is fraught with scams. To help avoid scammers, it’s important to research any credit repair organization before agreeing to work with it.
How to verify a credit repair company
There are “all kinds of ways” to vet credit repair companies, McClary says. Here’s somewhere to start.
- Read reviews of the company on the Better Business Bureau website
- Search the Consumer Financial Protection Bureau’s complaint database
- Search additional review sites for helpful user reviews
- Remove accurate negative information from your reports
- Legally create a new credit identity for you
- The company requests you pay before it provides services
- Guarantee improved credit
How do credit repair companies work?
Then, it will set a plan for disputing errors and negotiating with creditors to remove those items.
That plan may include sending …
- Requests to validate information
- Letters to dispute erroneous negative marks
- Cease-and-desist letters to debt collectors on your behalf
The company may also recommend applying for new accounts to add positive information to your reports. Be cautious here. If you’ve had trouble managing credit in the past, a new account may not be the best option. Plus it’s not a great idea to take on more credit if you don’t need it.
How much does credit repair cost?
The amount you’ll pay and how it’s calculated will vary depending on the company, but there’s a rule they have to follow. Credit repair companies can’t request or receive payment until they deliver the promised results.
Depending on the company, you might pay a one-time flat fee, or pay for each derogatory mark the company removes from each of your reports. This may start around $35 per deletion and could range to $750 or more.
Think about how much work your reports need. If there are just one or two negative items, you’ll likely be better off applying any fees toward paying down debt and disputing any errors in your credit reports yourself.
How long does credit repair take?
The credit bureau usually has 30 days after receiving your dispute to investigate and verify information. Typically, the credit bureau will reach out to the company that provided the information and ask them to investigate. The credit bureau is required to send you the results of the investigation within five business days of the completion of the investigation.
But if the credit bureau determines the dispute is “frivolous” it can choose not to investigate as long as it communicates that to you within five days.
Repairing your credit on your own
It’s possible to build good credit yourself. But many consumers don’t know where to start, says Gerri Detweiler, education director at Nav, which aims to help business owners understand and manage their business credit.
- Review your credit reports for errors
- Dispute incorrect information on your TransUnion® credit report on Credit Karma with the Direct Dispute™ tool
- Take steps to build your credit in the long term
What to watch out for
Consumers should “exercise extreme caution” when considering working with a credit repair company, McClary says. According to a 2016 notice from the CFPB, more than half the complaints it received about credit repair involved alleged fraud or scams.
Even if you find a company you’re comfortable with, the services may not work for your situation. Plus you’d likely save money if you disputed any incorrect information in your credit reports yourself.
The Credit Repair Organizations Act, or CROA, makes it illegal for credit repair companies to lie about their services and results, and sets some additional rules. If you think you might be the victim of a credit repair scam, or if you’ve had other issues with a credit repair company, you can submit a complaint to the Consumer Financial Protection Bureau.
- Giving you a written contract that explains your legal rights and the services they’ll provide
- Allowing you to cancel within three days without charge
- Fulfilling the promised service before charging you or receiving fees
If a credit repair company refuses to answer your questions, requests payment up front or fails to put promises in writing, “that’s part of the ‘sniff test’ that tells you there’s something wrong there,” McClary says.
If you’re looking into a credit repair company, consider all the warning signs and be aware of potential scams. We recommend considering credit counseling first. Ultimately, you may be able to rebuild your credit yourself.