Your credit score is an important part of your finances. It can help you in a variety of different ways from getting a home, buying a car, qualifying for loans, and more. However, it can be difficult to manage your credit. That is why many people turn to credit repair companies when they feel like they need help. It’s important to keep in mind that credit repair companies may not be your best choice. In fact, there may be better ways to handle credit repair that achieve the same goal for free!
Understanding Your Credit Score
It is important that you have a clear understanding of your credit score and how it can help you succeed in life. Your credit score is a number between 300 to 850 that shows the creditworthiness of yourself as a consumer. A good rule of thumb to keep in mind is the better the credit score then the better off you’ll be.
Your score is determined by the information found on your credit report. There are two known scoring models which are FICO® Score and VantageScore. The FICO scoring model is most popular amongst credit bureaus. Credit bureaus (also referred to as credit reporting agencies) are the ones that will determine your score based on your report. Your report consists of information about your credit history like your currently open accounts, level of debt, repayment history, and more. How they impact your score will be based on the scoring model. Lenders will look at your credit score in order to better understand how you are as a borrower. This can help them get a better idea of how you repay loans, handle financial responsibilities, etc.
What Factors Impact Your Credit Score?
Regardless of the scoring model, the same five core factors will impact your credit score:
- Payment History
- Credit Usage
- Credit Age
- Hard Inquiries
- Credit Diversity
Your payment history is the biggest factor that will impact your credit, and it makes sense why. Since lenders look at your credit score as a way to understand you as a borrower, your payment history will play an important part. For example, if you have a history of making late payments, having debt go to collections, etc., then your score will show that. This can lead lenders to flag you as high risk and not want to lend to you.
If you do have any negative marks on your report from your payment history then luckily they will generally fall off of your report after at most 10 years depending on the type of payment history issue. Bankruptcies will last for up to ten years, collection accounts will last for up to seven years, etc.
Your credit usage, also referred to as your credit utilization ratio, looks at your total available credit compared to the amount of credit that you are currently using. This is the second most impactful factor on your credit score. You should keep the amount of credit you use below 30%. Let’s look at an example. Let’s say you have a credit limit of $900 between two credit cards. You will want to keep your utilization rate (basically just how much you use) below $270.
The age of your credit isn’t just how long you have ever owned credit. Instead, it looks at a bunch of factors like the age of your oldest account, the age of your newest account, the average age of your account, and your most recent account activity. This is the third most impactful factor that can help or hurt your credit score. That is why it is important to be aware of this when deciding on whether or not you want to close certain credit accounts.
There are two types of inquiries that your credit will deal with. There are soft inquiries and hard inquiries. Soft inquiries have no impact on your credit at all. On the other hand, hard inquiries can have an impact on your credit score. Generally, a hard inquiry can reduce your score by around 5 points.
Luckily, these inquiries are not on your credit forever and will decrease in impact until they fall off after about 2 years. These inquiries allow lenders to access a more in-depth look at your credit report which is why they require written authorization from the consumer. The impact that hard inquiries have on your credit score are about the same as your credit diversity.
It can be helpful to have some diversity when it comes to your report. Having different types of credit like revolving credit accounts and installment loan accounts can help improve the overall health of your credit. This isn’t one of the main factors that impacts your credit, but it can definitely make your credit health better!
What’s the Difference Between Your Credit Report vs Your Credit Score?
When learning about your credit it may be confusing to understand how your credit report is different from your credit score. That’s okay! Knowing this difference is important, especially when it comes to understanding credit repair. Simply put, your report has a history of your credit information that gets calculated by the bureaus into a credit score that shows your creditworthiness. There are three major credit reporting agencies which are Experian, Transunion, and Equifax. These bureaus, also referred to as credit reporting agencies, will be the ones to determine your score based on the information found on your report.
What is Credit Repair?
The process of improving your poor credit status is referred to as credit repair. People can repair their credit through the dispute process. If there is a mark on their credit report that they want to dispute, then they have the right to do so with the credit bureaus. If the credit bureaus find the mark to be incorrect then they can remove it from a person’s report. Once a negative mark is removed then you won’t see the impact on your report which may be able to boost your credit score.
Credit repair may be harder than a simple dispute if it is a complex case like dealing with identity theft. Regardless of the reason, some people choose to get help with repairing their credit. That is why they turn to credit repair companies. Instead of doing it yourself, you may be able to get the help of a credit repair company to do it on your behalf.
How Credit Repair Works
Understanding how credit repair works doesn’t need to be as hard as it may seem. Credit repair can work in a number of ways, depending on how you do it and what your situation is. Regardless, credit repair basically consists of disputing a mark on your credit report. You can submit a dispute with one of the main credit bureaus. Generally people can handle the credit repair process themselves by reviewing their report then disputing marks that they feel are inaccurate. Some people handle this process with a credit repair company.
Besides disputing marks on your report you can work on repairing your credit by improving how you handle it. You can better manage your credit usage and credit activity. When you better handle these aspects of credit you may see your score improve more than you would’ve with disputing negative marks on your report!
How Much Does Credit Repair Cost?
The cost of credit repair will depend on what you are doing to repair your credit. Some forms of credit repair are completely free. However, if you decide to get help from a credit repair company then you can generally see either subscription-based credit repair or pay-per-removal credit repair. Generally companies use the subscription-based model. This means that usually prices range from $19 to $149 a month, depending on the services and plan you sign up for. You may also be responsible for additional fees. It’s important to keep in mind that you can still repair your credit without spending anything if you choose to do it yourself!
Does Credit Repair Actually Work?
Many people feel like their credit situation is hopeless. However, credit repair may be able to provide some missing hope! Besides good habits, disputing negative marks on your credit may actually work if the mark is inaccurate or unverifiable.
There are some items that may have a better chance at getting successfully disputed. Popular disputed items are:
- Invalid Items
- Outdated Items
- Unverifiable Items
This can be one of the easiest types of disputes because the information is just wrong. There are protections for consumers in place that require credit bureaus to remove any inaccurate information from their report. Errors like spelling mistakes, misreported accounts, etc., are ones that can usually be easily removed.
Another popular disputed item are outdated ones. A majority of negative items stay on your credit for a specific period of time. For example, if you had an account sent to collections, you can expect it to stay on your credit report for up to 7 years. Another example would be hard inquiries that should stay on your report for up to 2 years. If these marks don’t automatically fall off, you can dispute them!
One common disputed item is unverifiable items. If creditors are unable to show an item’s validity, then it will need to be removed. Creditors must show credit bureaus that the negative mark belongs to you.
Regardless of whether you want to handle the dispute process yourself or with a credit repair company, you should keep these items in mind. These commonly disputed items may be able to be removed from your credit report. However, not every negative mark is on every version of your report depending on what credit bureau you check. That means that you may not see an improvement on all of your credit scores, depending on where you look.
What is a Credit Repair Company?
Credit repair companies are organizations that can help consumers handle the credit dispute process on their behalf. They would do the same thing that a consumer can do like analyzing their credit report and disputing eligible items. Credit repair companies will advertise that they can be especially helpful to consumers since they have the background and knowledge with handling credit disputes. This can save consumers time and energy but definitely not money. These companies are all set up differently so can vary in services offered, pricing, etc.
How Do Credit Repair Companies Get Items Removed?
Credit repair companies can get items removed from your credit report by disputing the items with one of the three main credit bureaus. They may also try to dispute the items with data furnishers as well. Data furnishers generally include debt collectors, banks, credit card issuers, and other financial institutions.
They can either update the negative mark in some way or get it removed completely. They may try different dispute methods like “jamming”. Jamming is a term that refers to when credit repair companies send a bulk amount of dispute letters to credit bureaus and data furnishers. Tactics like these aim to take advantage of protections in place from legislation. If a credit bureau cannot respond within the 30-day period then the item will be removed.
What are Credit Repair Services?
Besides analyzing and disputing items on your credit report, credit repair companies may offer other services. Some other credit repair services can include credit monitoring, writing letters on your behalf, communicating to credit bureaus/data furnishers on your behalf, and more. However, every credit repair company is different so some services may not be available at every company.
How Fast Do Credit Repair Companies Work?
You will need some patience when it comes to credit repair companies. Credit bureaus have 30 days to respond to the dispute. Once they respond, they may need additional information. That is why generally the dispute process from start to finish can take three to six months.
How to Verify a Credit Repair Company?
Just like any industry, there are people that may try to take advantage of those in need. People generally looking for credit repair may not be in the best financial situation. Luckily, there is legislation in place that can help people during the credit repair process.
Fair Credit Reporting Act (FCRA)
The Fair Credit Reporting Act (FCRA) regulates the information on your credit report. This is what provides you rights like:
- The right to be told how your credit information will impact your account. For example if your credit impacts your credit application, insurance, employment, etc.
- The ability to request and access information on your report
- A free credit report once a year from each national credit bureau
- Restricted access of others to your report. That is why hard inquiries are required to access this information with a signature from the consumer.
- The right to dispute any inaccuracies on your report.
Credit Repair Organizations Act (CROA)
The Credit Repair Organizations Act (CROA) is an important protection that consumers have when it comes to credit repair companies. Under CROA, companies are not allowed to:
- Misrepresent their services. This can include exaggerating what they can do for the consumer.
- Falsely represent your credit. They must handle the dispute honestly and cannot make false statements about you.
- Provide you a new identity or claim that they will give you a new identity.
- Charge an upfront fee of services that have not been performed yet. They can only charge you once they actually do the service.
- Make the consumer waive their rights.
Many people consider credit repair as a way to improve a part of their financial situation. Your credit score is an important factor of your finances and can be useful when buying a car, getting a home, etc. Your score is calculated by credit bureaus based on information that is listed on your credit report.
When you have negative marks on your report, you can dispute them yourself or get the help of a credit repair company. Credit repair companies can be useful but don’t provide any assistance that a consumer can’t do on their own. They cost money but aim to help consumer’s save on time and effort. The best decision that you can make when it comes to credit repair depends on your current financial situation and your goals. If you have any questions you should get in touch with a professional for more advice!