Credit Repair Companies: How They Work, Pros & Cons and Alternatives

posted in: Money Blog, Uncategorized

 

Improving one’s credit score can be an arduous task that makes a big difference in someone’s financial future. Having a strong credit score is necessary to get approval for loans and financing and directly impacts the terms. In most cases, the better the credit score, the better the interest rates. 

People make mistakes and experience financial hardships— that’s just a fact of life. That’s why many people look to credit repair agencies to help them start fresh by improving their credit scores.

Here’s what you need to know about working with credit repair companies and what other options to explore.

What is a Credit Repair Company?

A credit repair company is a service that reviews your credit report and pursues relevant correction channels via communication with creditors and credit bureaus. Their goal is to manage communications to have negative items that impact your score removed from your report.

Credit repair companies are often run by those who have been through the process before and see an opportunity to help others. While no formal education or training is required to open a credit repair company, they must comply with the FTC’s Credit Repair Organizations Act

How do Credit Repair Companies Work?

The process of working with a credit repair service typically starts with a consultation to review your credit report. It’s important to note that the CROA mandates that credit repair agencies can’t charge a client before the service is rendered. If the service you hire tries to charge you upfront, report them.

The credit repair expert will review your documents and determine whether negative items are ideal for a dispute. Then, they’ll send letters to the creditors to validate the data. The creditor has 30 days to respond with proof of data. If they fail to provide validation, the credit repair company will submit a formal dispute to the creditor and credit agencies.

Depending on the agency, you’ll be charged a flat rate per removal or a subscription-style rate for the project’s duration.

Pros of Working with a Credit Repair Company

Credit repair companies don’t do anything that a consumer couldn’t handle themselves. However, writing the correct type of letter to secure data validation and a dispute is paramount for success. A credit repair professional knows what to say and where to send the pertinent information to get results.

Reviewing and correcting credit report data takes time and dedication. Outsourcing this task to someone familiar with the process will help save time and stress while correcting your credit score.

Cons of Working with a Credit Repair Company

One of the negative aspects of working with a credit repair company is the cost. If you’re already experiencing financial trouble, adding another bill might not be the best way to get out of it. Furthermore, disputing items doesn’t guarantee that the creditors will remove them.

Finally, there are plenty of fly-by-night credit repair companies out there that are just interested in your finances. It’s crucial to research the company you’re hoping to work with and get some unbiased reviews. As mentioned before, this is something you could manage yourself with some research and great software.

Alternatives to Working with a Credit Repair Company

The most common alternative to working with a credit repair company is taking a DIY approach. You can find templates for credit dispute letters online or use software to help navigate the process.

While disputing existing negative items can help improve your credit score, it doesn’t replace the importance of smart financial habits. Focus on incorporating credit-boosting activities like:

  • Making minimum payments every month
  • Paying your bills on time
  • Paying down existing debt
  • Improving your debt ratio
  • Limiting hard inquiries

Most important of all, improving your credit score takes time. Negative items have different weights and statutes of limitations that impact your score less as time goes by. For example, a hard inquiry (i.e., applying for financing) will typically stay on your report for two years and have a slight negative impact on your score. Conversely, a bankruptcy will stay on your report for up to 14 years and weigh heavily.

Instead of working with a credit repair agency, focus on a DIY approach and building strong financial habits that will set you up for lifelong success.