If you’ve been turned down for a credit card or loan because of an embarrassing credit score, you might think hiring a credit repair service could help. But don’t sign a credit repair service contract until you understand what these companies can — and can’t — do for you.
“It’s important to know there’s no magic pill that credit repair companies can give you to fix your credit,” says Carolyn Warren, author of “Repair Your Credit Like the Pros.” “Anything they can do, anyone can do themselves.”
What Is a Credit Repair Company?
A credit repair company goes over your credit reports from each credit reporting bureau, reviews negative items and looks for errors. The company can then request errors be removed and negotiate with your creditors to resolve disputes.
[Read: Best Credit Cards for Bad Credit of 2018.]
“Even though individuals can challenge incorrect information on their own, they often choose to hire a credit repair company because they don’t want to deal with the credit bureaus or their creditors themselves,” says John Ulzheimer, an Atlanta-based credit expert, formerly with FICO and Equifax. “Sometimes they’re frustrated by the lack of progress if they’ve tried to fix things themselves. Sometimes it’s their natural inclination to outsource personal services, just like hiring someone to do your taxes.”
Credit repair services charge a monthly fee of between $80 and $129, says Ulzheimer. A simple correction on your credit report could take only a month or two, while reports with multiple errors requiring negotiations and significant documentation could take a year or longer.
For years, credit repair companies have had a reputation for charging high fees without helping consumers and sometimes causing worse financial distress. But Ulzheimer says a 1996 federal law called the Credit Repair Organizations Act, or CROA, which established rules for these types of services, and self-policing by the credit repair services trade association helped clean up the industry. In addition, the Federal Trade Commission charged numerous credit repair companies with federal law violations and imposed penalties on them.
“Today, there are considerably more legitimate credit repair companies than there were 20 years ago,” Ulzheimer says.
At the same time, Bruce McClary, vice president of communications for the National Foundation for Credit Counseling, says it’s still important to do your research about whether credit repair services are your best option and, if so, which companies will do the best job.
“I recently saw a pickup truck parked in a shopping center with signs all over it that said, ‘Need help with your credit? Call me!'” he says. “People who are in a desperate situation may think that calling a guy whose phone number is on a truck makes sense, but it’s never so bad that you can’t take a few hours to investigate your options first.”
Before You Contact a Credit Repair Service
As you’re deciding whether you need professional credit repair, study your own credit report. You can get a free credit report annually from each of the three credit reporting bureaus — Equifax, Experian and TransUnion — at AnnualCreditReport.com. Checking reports from each of the three is essential because they don’t always have all the same information.
[Read: The Best Starter Cards for Building Your Credit.]
When you review your credit report, check for derogatory marks, like missed payments, or errors. For example, the credit bureau or your lender might have mixed you up with someone else with a similar name, and as a result, your credit report might have the wrong address and account information. According to the Consumer Financial Protection Bureau, errors related to your account status, balance and credit limit are also common.
If you hire a credit repair service, you’ll go over each credit report with a representative from the company and provide documentation that supports your dispute, such as paid invoices or court records. Be prepared to answer questions about your credit history frequently throughout the credit repair process.
Do-It-Yourself Credit Repair
That said, you can start the process by fixing mistakes yourself.
“A lot of genuine mistakes can be corrected by individuals, such as a medical bill that you’ve paid that hasn’t been reported as paid in full,” says Warren. “You can submit copies of paid invoices to the credit bureau, but you should always keep the original yourself.”
You also have the right to challenge a derogatory mark that isn’t 100 percent accurate, says Warren, such as a creditor reporting you were 90 days late paying a bill when you were only 60 days late. If a bill that went to collections was sold to another debt collector and your credit report incorrectly shows the same overdue balance multiple times, you can request the credit bureau correct it.
Keep in mind that some legitimate derogatory information, like bankruptcies and accounts sent to collections, will remain on your credit report for as long as seven to 10 years. Unpaid liens can be reported indefinitely.
Red Flags
If you decide to hire a credit repair service, watch out for companies that:
— Demand an upfront payment. This practice is banned by CROA.
— Don’t provide a contract. Companies are required to provide a written contract that includes cancellation rights for consumers.
— Promise a quick and simple fix. No credit repair company should tell you it can help you fast, says Warren. “By law, the credit bureau has 30 days to respond when you challenge something on your report,” says Warren. “Then, if the credit bureau doesn’t agree with your challenge, you can go directly to the creditor, who then has 30 days to respond. The credit bureau has another 30 days to respond after you provide information from your creditor.”
— Guarantee they’ll raise your score or fix an error. “Run if anyone guarantees they can remove something from your report,” says Ulzheimer.
— Have complaints against them. McClary suggests reading reviews online and checking the CFPB complaint database. You should also check with the attorney general and corporate commission offices in your state as well as in the state where the company is headquartered.
— Suggest they can remove legitimate negative information. You want to avoid working with a company that does anything illegal on your behalf, says McClary.
— Ask you to lie. Asking you to make a misleading statement about information on your credit report is a blatant violation of CROA, says Ulzheimer.
— Suggest you create a parallel identity. While this strategy isn’t common, Ulzheimer says some nefarious companies offer to create a new credit profile based on a new employer identification number, rather than your Social Security number.
Good Signs
Just because a company adheres to CROA doesn’t mean it will necessarily be effective in helping you with your credit report, says Ulzheimer. A good credit repair company should:
— Offer a free consultation. A good credit repair company will review your report and tell you what it can and can’t do, says Warren. For instance, it can remove duplicate accounts, but it can’t erase a public bankruptcy.
— Have a track record. “Longevity has value,” says Ulzheimer. Companies that have been in business at least five years or longer and that haven’t been shut down by the FTC for violations are more likely to be legitimate, he says. Similarly, when checking out credit repair companies, Warren suggests asking if they have resolved situations similar to what you’re facing, such as removing an IRS lien.
— Have an attorney on staff. Attorney-owned or -operated services that have at least one attorney working with them will make sure everything is done legally, says Warren.
— Explain your options. You need to understand your recourse if your goals are not achieved, says McClary.
— Offer a performance warranty. Warren says companies should offer a warranty on their performance that states they won’t charge you if they can’t remove a certain number of disputed items on the credit report.
— Adhere to local laws. “Always check that a company is licensed, bonded and insured,” says Warren.
[Read: Best Secured Credit Cards of 2018.]
One more note of caution for consumers: “Read all the disclosures in the contract, and don’t set up an auto-deduct payment plan,” says Warren. “It’s better to provide postdated checks so you have more control over your money.”
Nonprofit Credit Counselor Option
If you prefer not to do your own credit repair, another option is to work with a nonprofit credit counselor. Nonprofit credit counseling services are typically free or charge a small fee.
Unlike credit repair services, nonprofit credit counselors won’t contact the credit bureaus on your behalf. However, they can help you learn how to dispute errors or handle identity theft or credit card fraud yourself. They can also help you develop a spending plan, and show you techniques to manage your money and improve your credit score in the long term. If you’re considering a nonprofit credit counselor, look for ones who are certified, and check whether they have complaints against them with your state attorney general or local consumer protection agency, according to the FTC.
Whether you hire help or handle credit repair yourself, taking steps to resolve problems with your credit report can put you on the path to a stronger financial future.
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How to Find Reputable Credit Repair Services originally appeared on usnews.com
