Wondering whether you should go with debt consolidation vs credit repair to improve your standing with credit bureaus? You’ve come to the right place. Today, we’re going to talk about credit repair vs paying off debt. You’ll learn what each of these tactics entails and which is right for you – so you can feel confident in your next steps.
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. As your credit score dwindles and you’re drowning in debt, you can feel hopeless. Luckily, there are ways that people can regain control of their financial situation. And in our complete breakdown on debt consolidation vs credit repair, you’ll learn all you need to know.
First things first, though – let’s talk about how to figure out your current financial situation.
First Things First – What is 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! Before going any further, we need to break down credit scores and credit reports.
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 – including stats on the total number of accounts you have open, your 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!).
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. For example, the FICO scoring model is:
- Excellent: 800+
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: <580
Debt Consolidation vs Credit Repair: What is the Difference?
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
We will break down everything you need to know about both repairing your credit and paying off debt. After that, it will be much easier to break down whether debt consolidation vs credit repair makes the most sense for your unique financial situation.
Everything You Need to Know About 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.
Using 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.
Everything You Need to Know About Paying Off Debt (Consolidation)
Another way that people aim to improve their situation is by paying off debt – or debt consolidation. 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!).
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!
So, Which is Right for You in the Debt Consolidation vs Credit Repair Debate?
Now that we’ve covered both credit repair and paying off debt – which of these two tactics is right for you? Should you go with a combination of the two, or is one more beneficial than the other? The truth is, your unique financial situation will dictate whether debt consolidation vs credit repair makes the most sense. We always recommend chatting with a financial professional to come up with a plan that is tailored specifically to you and your credit history.
You’ll have to determine whether you want to go the credit repair route and do it yourself or hire a credit repair company. This approach is easier for many people – but, choosing not to pay off your debt does take a long term toll on your credit history. As such, paying off debt is the more effective long term approach to optimizing your credit.
Frequently Asked Questions About Debt Consolidation vs Credit Repair
Regaining control of your financial situation can be stressful and even a little scary for some. But now that you know all about credit repair vs paying off debt, you should feel a bit more confident in your ability to regain control of your credit and your financial standing. 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! You’ll have to consider paying off the debt – or taking the hit to your credit that comes with not paying it off.
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 service. If this law is violated then individuals may face penalties – which is why you won’t find credit repair companies willing to work in the state.
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 credit repair 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 the credit repair organizations 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 Common 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 companies 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.
Final Thoughts on Credit Repair vs Paying Off Debt (Consolidation)
That concludes our guide to debt consolidation vs credit repair. If you want to learn more about what all a credit repair service can do for you, take a look at some of our blog posts. We have written complete guides on topics like can credit repair remove late payments, credit repair for veterans, credit repair for low income families, and can credit repair help with student loans.
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 with 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!