Credit Repair vs Paying Off Debt

If you are someone that struggles to manage their financial situation, you aren’t alone. In fact, the lack of financial literacy like money management skills cost Americans roughly $415 billion back in 2020. When people don’t have these skills, this can lead to issues like high amounts of debt, a low credit score, and more. Luckily, there are ways that people can regain control of their financial situation.

How to Understand Your Financial Situation

Before you can dive into fixing your finances, you will need to get a clear picture of what you’re working with. You can get assistance from a professional like a financial advisor to help you or you can do it on your own. If you choose to do it on your own you will want to start by getting a budget together. Your budget will consist of information like monthly income, monthly expenses, debts, your credit score, and more.

When you get all this information together you can begin focusing on problem areas. For example, let’s say that you notice your credit score is low. If you find that your score needs improvement you can look and see why. Maybe high amounts of credit card debt have a negative impact on your score. You can plan how you want to improve your situation accordingly based on that information!

Understanding Your Credit Score

A very important factor in regaining control of your finances is making sure you handle your credit responsibly. Your credit score is usually a number between 300 to 850. This score is calculated by the credit bureaus based on information found on your credit report. Your credit report has detailed information about your credit history like total number of accounts, credit usage, and more. There are three major credit bureaus which are Transunion, Equifax, and Experian. The bureaus that calculate your credit score base it off of a scoring model. There are 2 major scoring models which are VantageScore and FICO (but it’s important to note that the FICO scoring model is more popular!).

What Factors Impact Your Credit Score?

There are five factors that will have an impact on your credit score which are:

  • Payment History
  • Credit Utilization Ratio
  • Length of Credit History
  • Hard Inquiries
  • Types of Credit

What Category Does Your Score Fall Under?

There are plenty of ways to check your credit score for free. Some ways would be to use a third party platform like Credit Karma, or by checking with your credit card company like Discover. Once you find out your score you will also see that it falls under a category. Credit bureaus base the categories of your score on the scoring model they use. According to the VantageScore model:

  • Excellent: 781+
  • Good: 661-780
  • Fair: 601-660
  • Poor: 500-600
  • Very Poor: <500

However, the FICO scoring model is different! According to the FICO scoring model:

  • Excellent: 800+
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: <580

Ways to Improve Your Financial Situation

Now that you have a general understanding of your finances, you can begin working on ways to improve them! There are countless ways that people can work on bettering their finances. The way that would work for you is based on your situation. Popular ways that people choose to improve their finances include:

  • Credit Repair
  • Paying Off Debt

Credit Repair

Credit repair is a popular option that people consider when improving their finances. There are different ways that people can handle credit repair. You can either choose to handle credit repair on your own or you can get help from a credit repair company.

Credit Repair on Your Own

If you choose to repair your credit on your own you can do so through improving your habits and disputing errors found on your credit report. Improving habits includes proper management of your credit like:

  • Make payments on time
  • Keep your credit utilization rate below 30%
  • Don’t get too many new accounts at once

There are plenty of more tips that can improve your credit but those would address the top three factors that impact your score which include payment history, credit utilization rate, and length of credit history. However you can also decide to dispute errors found on your credit report.

Consumers have the right to dispute inaccurate information found on their credit report thanks to the Fair Credit Reporting Act (FCRA). This is a federal law that aims to ensure the accuracy, fairness, and privacy of the information of a consumer’s credit history. Another agency that aims to make sure consumers are treated fairly is the Consumer Financial Protection Bureau (CFPB).

You can get a free copy of your credit report once every year at AnnualCreditReport.com. If there are inaccurate items found on your credit report, you have the right to file a dispute. Credit bureaus then generally have 30 days to investigate and respond to these disputes. If the information is found to be inaccurate they will need to remove it from your report and the negative mark will fall off.

Use a Credit Repair Company

Instead of handling the dispute process on their own, some people choose to get help from a credit repair company. Credit repair companies are organizations that review your credit report and dispute inaccurate or unverifiable items on your behalf. These credit repair companies aren’t  free and credit repair services can be costly. The amount that credit repair services will be depends on factors like the credit repair company you choose, the credit repair services you need, and more.

Credit repair companies can come with a lot of controversy since some have a history of being scams. Luckily, the Federal Trade Commision (FTC) highlights how the Credit Repair Organizations Act (CROA) offers protections for consumers. However, these companies don’t offer services that a consumer cannot do on their own.

Paying Off Debt

Another way that people aim to improve their situation is by paying off debt. There are plenty of ways that people can choose to tackle their debt. 3 popular ways include:

  • The Debt Avalanche Plan
  • The Debt Snowball Plan
  • Debt Consolidation

The Debt Avalanche Plan

When people choose the debt avalanche plan, they handle their debts with the highest interest rate first. Even though they focus on high interest rate debts, they still pay the minimum required on other debts! This can help people save money and even time over the course of paying off their debt.

The Debt Snowball Plan

If a consumer chooses the debt snowball plan, they focus on their smallest debts first. Even though their focus is on their smallest debts, they will still pay the minimum amount due on their other debts. As they pay off their debts, they roll the amount they had been paying into payments on the next largest debt (creating a snowball effect!).

Debt Consolidation

Another popular way that people handle debt is with debt consolidation. Debt consolidation is the act of combining multiple debts into one through a loan (typically a debt consolidation loan). The terms of the loan will vary based on the financial institution that provides it as well as the information of the borrower!

Frequently Asked Questions

Regaining control of your financial situation can be stressful and even a little scary for some. A lot of people tend to feel hopeless when learning about their situation. Many people have had questions that you may have along the way as well!

Can Credit Repair Get Rid of Debt from Your Credit Report?

If there is an inaccurate debt item on your credit report that is found to be incorrect, then yes! Credit repair would be able to get that debt removed since it doesn’t belong to you. However, if you want to get rid of verifiable debt from your credit report then you are out of luck!

Is Credit Repair Legal?

Credit repair is legal in all 50 states with the exception of Georgia. Georgia has some special legislation around credit repair where it is generally illegal to run a credit repair business. If this law is violated then individuals may face penalties.

What are Credit Repair Services?

Some credit repair services that credit repair companies provide include analyzing your credit report, and disputing inaccurate or unverifiable information. However, some companies may offer additional services like credit counseling, monitoring services, and more.

Credit Repair vs Paying Off Debt: Which is Better?

There is no “better option” in this case! The best way to handle your finances is based on details about your situation. If you don’t have any debt, then paying off debt wouldn’t be the best option for you to improve your financial situation. If you need advice you should get in touch with a professional like a financial advisor or personal banker.

What Protections does the Credit Repair Organizations Act (CROA) Provide?

According to the Federal Trade Commission (FTC) some protections that this act provides to consumers includes:

  • Credit repair companies cannot demand payment in advance
  • Credit repair contracts must be in writing
  • Consumers have certain contract cancellation rights

What are Popular Kinds of Debt?

There are a variety of different kinds of debt that people can have. Popular debts include:

  • Mortgage debt
  • Credit card debt
  • Healthcare debt

How Much Does Credit Repair Cost?

The amount that you will need to pay for credit repair varies depending on your situation, the company you choose, the services you need, and more. However, you can generally expect that it costs $50-$150 per month.

Overall

Your financial situation can be complex and stressful to figure out. You can use the help of a professional or do it on your own. If you choose to do it on your own you can create a budget and learn your credit score. This will provide you an idea of where you will need to focus on improving. Many people choose to repair their credit themselves, get help from a credit repair company, or pay off debt. There may be more ways that you can handle your situation than you think!

Article References

https://spendmenot.com/blog/personal-finance-statistics/

https://www.investopedia.com/terms/c/credit_score.asp

https://www.experian.com/blogs/ask-experian/credit-education/report-basics/fair-credit-reporting-act-fcra/

https://www.consumerfinance.gov/

https://www.annualcreditreport.com/index.action

https://www.experian.com/blogs/ask-experian/how-long-does-it-take-to-complete-the-dispute-process/

https://www.experian.com/blogs/ask-experian/how-do-credit-repair-companies-work/

https://www.ftc.gov/enforcement/statutes/credit-repair-organizations-act

https://www.nerdwallet.com/blog/pay-off-debt/

https://www.thebalance.com/is-credit-repair-illegal-5094336

https://www.ftc.gov/enforcement/statutes/credit-repair-organizations-act

https://www.forbes.com/advisor/credit-score/credit-repair/

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