Should I Use a Credit Repair Company?
Money Girl answers listener questions and tells you the truth about using a credit repair company.
Laura Adams, MBA
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Should I Use a Credit Repair Company?
I recently received several questions about using credit repair companies.
Latanya asks: “My husband and I have poor credit even though we paid someone $2,800 to repair it a couple of years ago. Do you know how we can fix our credit without spending money that we don’t have?”
Ashley asks: “I checked my credit report and found 3 accounts that I don’t recognize. They show delinquent payments—no wonder my credit is so bad. Should I hire a credit repair company to fix this?”
Ron asks: “I have very poor credit because I’ve made a lot of bad decisions and now have a ton of debt. Should I use a credit repair company to get my credit cleared up?”
In this episode I’ll answer these questions and tell you the truth about whether you should use a credit repair company..
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Are Credit Repair Companies Legitimate?
You’ve probably seen or heard TV and radio ads that say something like, “Got credit problems? Let us help you erase your bad credit forever, guaranteed!”
Unfortunately, these ads are likely signs of a scam. There are no legitimate organizations that can make those kinds of claims. As much as you might want to believe it, there’s no quick fix for poor credit.
No one can legally remove negative information from a credit report, if it’s accurate. Only time can help. It takes 7 years for bad marks to go away—except for bankruptcy which sticks around in your credit history for up to 10 years.
According to the Credit Repair Organization Act (CROA) it’s illegal for a credit repair company to misrepresent their services or to even charge you before they’ve delivered those promised services.
They’re forbidden to suggest that you do anything illegal, such as:
- making false statements on a loan or credit application
- altering your identity to change your credit history
- applying for an Employer Identification Number to give creditors instead of your Social Security Number
- misleading a credit reporting agency
Following illegal advice means you’re committing fraud and may be subject to fines or jail time.
If you’re like Latanya and have been burned by a bogus credit repair company, you can sue them for your financial loss and even seek additional punitive damages. Be sure to report problems with a credit repair company to your state attorney general and to file a complaint with the Federal Trade Commission at ftc.gov/complaint.
Following illegal advice means you’re committing fraud and may be subject to fines or jail time.
How to Repair Mistakes in Your Credit Report
But let’s say you’re like Ashley and have inaccurate information in your credit file that’s hurting your credit. Errors could range from fraud to mistakes in reporting from creditors.
You have the right to dispute credit errors and get them corrected for free.The credit reporting agencies and the companies that provide your information to them are responsible for correcting errors in your credit history.
So you should never pay any person or organization to clean up your credit report. The truth is that anything a credit repair company can do legally, you can do for yourself at little or no cost!
You’re entitled to a free report from each of the 3 nationwide credit reporting agencies—Equifax, Experian, and TransUnion—once every 12 months at annualcreditreport.com. You can get all 3 reports at the same time, which is a good idea if you suspect a problem or haven’t checked them recently. Or you can stagger your credit report requests throughout the year, which is what I recommend.
I created a free video tutorial called the Credit Score Survival Kit, that shows you step-by-step how to get your credit reports and dispute errors at no charge. Staying informed about what’s in your credit report is a smart way to catch an identity thief who may be on a spending spree using an account opened up in your name.
The Federal Trade Commission also has information about how to do credit repair on your own.
What Causes Bad Credit?
To win the credit game, it’s critical to have credit accounts in your name and to manage them responsibly. Some common causes of bad credit are:
- making late payments
- having a short credit history
- having a “thin” file with no or too few accounts
- having high debt balances
Many people who are struggling with poor credit are like Ron, who said he’s accumulated more debt than he can handle.
See also: 7 Essential Rules to Build Credit Fast
How to Manage Debt
We get into debt for lots of different reasons, like racking up student loans, having unexpected medical bills, losing a job, or being a shopaholic. You have to gauge your own debt situation and face up to your ability or inability to help yourself.
Here are 5 debt management solutions to consider:
1. Earn more. Get a better-paying job, or a second or third source of income for a period of time, so you’ll have more money available to pay down your debt.
2. Cut costs. Be ruthless about eliminating expenses and becoming more disciplined with your money. Make extreme sacrifices like moving into a less expensive home, selling a car, or relocating to a less expensive town or city.
3. Settle debt. Contact creditors to negotiate discounted final settlements. This is an effective strategy that could substantially reduce your debt—but usually requires you to have cash to offer.
4. Consolidate debt. Pay off debt with a less expensive debt. Consolidation makes sense when you can reduce your interest rate and monthly payment. However, if lower payments are achieved by simply extending the length of a loan, be sure you won’t end up paying more interest in the long run.
5. Enroll in a Debt Management Plan (DMP). Seek out a credit counseling organization (which is different than a credit repair company) for guidance. If you qualify for a DMP, you deposit money each month that they use to pay your debts according to an agreement they work out with you and your creditors. In some cases, a creditor may reduce your debt, interest rate, or fees, if you have a DMP. See FTC Facts for Consumers for more information.
What Is Credit Couseling?
A reputable credit counseling organization can offer free information and workshops to help you create a budget, manage your money, and reduce debt. Certified counselors discuss your entire financial situation and work with you to develop an action plan. The National Foundation for Credit Counseling (NFCC) is a non-profit network that can refer to you a member organization in your area.
To sum up, there’s no magic bullet for curing an ailing credit report. If it’s riddled with errors, you can and should clean them up on your own. And if your credit is poor due to making terrible financial decisions, take ownership of your mistakes and make better decisions going forward.
Never compound financial and credit problems by paying a person or company for something you can do yourself, and risk receiving bad advice or getting scammed.
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Erase Bad Credit image courtesy of Shutterstock
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.