What Is Credit Repair?
Credit repair involves fixing your bad credit in any way, shape, or form. But when most people use the term “credit repair,” they’re referring to the process of challenging and disputing errors on credit reports.
You can go through the dispute process for free with each of the credit bureaus on your own. This involves filing a formal dispute with the credit bureau(s) in question either online or by mail.
In your formal dispute, you want to provide a detailed explanation of the error and include any supporting documentation you have along with it. Learn more about disputing errors on your credit report.
Many people don’t have the time to do their credit repair or don’t understand how to make their case. So they look into hiring a credit repair company to challenge and dispute errors on their behalf. These companies can charge a fee for their legwork—more on how that works below. There are times when the extra help is valuable. For example, if you have multiple errors across credit reports or you’ve been the victim of identity theft.
This article looks at both types of credit repair—DIY and paid—starting with credit repair businesses since there’s a good chance that’s what someone means when they use the term credit repair.
In This Piece
- How Long Does Fixing Your Credit Take?
- Is Credit Repair Legal?
- How Does Credit Repair Work?
- How Is Your Credit Score Calculated?
- What Hurts Your Credit Score?
- How Much Does a Credit Repair Service Cost?
- Why Is Credit Repair Necessary?
- Can You “Fix” Your Credit on Your Own?
- Get Your Free Credit Score
How Long Does Fixing Your Credit Take?
Fixing your credit by making good financial decisions, paying your bills on time and minimizing your credit utilization ratio, can take time. It can often take three or more months for all this good data to end up on your credit report so it can impact your score.
Disputing negative information on your credit report could be a slightly faster way to potentially improve your credit—assuming there are inaccurate items. The credit bureaus have a limited amount of time to investigate and respond to these disputes, so it’s possible you could see changes in around 45 days.
Is Credit Repair Legal?
Yes, credit repair is legal under federal law. The Fair Credit Reporting Act (FCRA), Title VI of the Consumer Credit Protection Act, protects consumers from accidental, negligent, or deliberate inclusion of inaccurate, unfair, or unsubstantiated information in credit report data provided by creditors to credit bureaus.
This shields you from damage to your credit which can be caused by factors beyond your control such as typos, outdated data, malicious creditors, or identity theft. If you notice incorrect, unverified, or otherwise disputable information on your credit report, you have a legal right to contest it. You can do this yourself, or credit repair services can assist you with this process.
How Does Credit Repair Work?
Credit repair involves contacting credit bureaus and, in some cases, your creditors, to dispute inaccurate, unfair, or unsubstantiated information. In some cases involving simple corrections, you may choose to do this yourself. However, because you need to contact all three major credit bureaus if the error is on all three reports and because some disputes can involve contacting creditors as well, you may wish to seek help from a professional credit repair service, particularly for more complex disputes.
Errors on credit reports are more common than you might think. And if you have items on your credit report that aren’t 100% accurate, entirely fair, and fully substantiated, you want to consider credit repair—either do-it-yourself (DIY) repair or by hiring a professional.
Appreciating why you might want to work with a credit repair service will be easier if you understand how credit repair works. Customized tools, educational approaches, and proven technologies offered by credit repair companies guide you through the tasks and action items you need to take to maintain a healthy score and accomplish your credit goals.
But a good place to start credit repair on your own is to check your credit report for errors. You can get free copies of your credit report at Annualcreditreport.com.
You can also get your free Experian Vantage 3.0 credit score and a credit report card that is updated every 14 days on Credit.com. Your credit report card shows where you stand in the five key areas that make up your score—payment history, credit utilization, account mix, credit age, and inquiries. It also shows you which areas need work and gives you tips on how you can work to improve your standing in each area if needed. Checking your credit report card and credit score doesn’t hurt your credit in any way.
How Is Your Credit Score Calculated?
Credit scoring systems such as FICO® assign consumers or businesses a number that helps financial providers evaluate how likely borrowers are to repay debt and how much additional debt they can afford to take on. Credit scores are based on factors that reflect the history of repaying debt on time, ability to repay current debt, and capacity to manage additional debt. Major factors used to calculate consumer credit scores include:
- Payment history: How often do you pay bills on time, and do you have any history of payment collections, bankruptcies, or foreclosures?
- Credit utilization: How high are your account balances compared to your credit limits?
- Credit age: How old are your credit accounts?
- Credit mix: Do you have experience managing debt payments for a diverse range of credit products, such as credit cards, student loans, auto loans, and mortgage loans?
- Credit inquiries: How often have you applied for credit recently?
Of these factors, payment history and credit utilization have the biggest impact on your credit score. In the most widely used credit scoring system, FICO, payment history counts for 35% of your score, while credit utilization counts for 30%. Credit age accounts for 15%, while credit mix and credit inquiries count for 10% each.
Note that your credit report will include a breakdown of other information about your financial history. These can include items such as a list of your revolving and installment accounts, recent hard and soft credit inquiries, and a history of collection actions and bankruptcies. Together with your credit score, these items help financial providers gain a more complete picture of your credit history.
For additional information to help you understand your credit score, see our Credit Score Guide.
What Hurts Your Credit Score?
The factors used to calculate your credit score can hurt your score when not managed properly. Some of the main factors which can lower your credit score are:
- Late payments: Because FICO’s scoring system places such weight on payment history, late payments can have a big impact on lowering your credit score. Even a single late payment that goes beyond 30 days overdue potentially can harm your score. More serious late payment issues such as collection actions, bankruptcies, and foreclosures can significantly lower your score. Prioritize avoiding late payments.
- Excessive credit utilization: If you carry a high balance on your credit cards, it can cause financial providers to be concerned that you’re short on cash or that you owe too much in monthly debt payments to take on new debt. Credit utilization above 30% of your balance is considered high. A rate of 10% or less is ideal.
- Short credit history: If your accounts are all-new, financial providers tend to look upon your ability to manage credit as unproven. Keeping accounts open for 7 years or more can help improve your credit history.
- Only one type of credit: If you’ve only handled one type of debt, such as a credit card or a student loan, lenders may not feel confident in your ability to handle other types of debt such as mortgages. You can improve your credit score by using a mix of different types of credit and keeping up with your payments.
- Too many new applications: If you apply for many different credit cards or loans over a short period, it looks like you’re desperate for cash, and it may raise suspicions that you’re a higher risk because of the extra activity. Hard credit inquiries stay in your file for two years, so take this into account before going on a credit application spree.
These are some of the biggest factors which can hurt your credit score. Following the guidelines above and avoiding these issues can help you minimize the need for credit repair.
How Much Does a Credit Repair Service Cost?
Credit repair services usually charge a monthly fee while they’re fixing your credit, and you also may need to pay a setup fee. Monthly fees can vary over what can be a period of several months to a year.
Some credit repair services may offer tiered packages with fees for additional services. For instance, some packages may offer credit score monitoring or identity theft alerts.
Why Is Credit Repair Necessary?
Credit repair is necessary because of the wide range of negative effects bad credit can have on your finances and your quality of life. Here are some of the potential side effects of bad credit:
- You may find it harder to get a loan to buy a new car or home
- Bigger, well-known, reputable lenders may be reluctant to give you a loan, forcing you to turn to less preferable lenders
- Qualifying for a credit card may be difficult
- If you do qualify for a loan or credit card, you may have to pay a higher interest rate than you would with good credit
- You may pay higher insurance premiums for home, auto, or renters’ insurance
- If you apply for a job that involves handling money, your prospective employer may run a credit check, reducing your chances of getting hired
- It can be harder to rent an apartment
- Utility companies may run background checks and require you to pay higher deposits
- Bad credit can keep you from qualifying for credit cards with better rewards programs
- You may have to delay saving money and building wealth until you can repair your credit
In short, there are many undesirable side effects to bad credit and no upside. If you have bad credit, it’s in your best interests to seek credit repair.
Can You “Fix” Your Credit on Your Own?
Yes, there are many things you can do to build or repair your credit on your own.
Tips for “Fixing” Your Credit
“Fixing” your credit starts with learning more about credit in general. When you understand what major factors go into your credit score, you know where to concentrate to improve your credit history.
Here are some ways you can “fix” your credit by addressing the five credit factors listed above.
- Timely payments. Pay your bills on time—in full, if you can, and, if you can’t, at least pay the minimum amount. If you are having difficulty with your bills, talk to your lenders about your situation or try to cut down on your expenses.
- Credit utilization. This is generally the second-most important factor for your credit score. For example, if you have a total credit card limit of $1,000 and you have a balance of $500, your credit utilization ratio is 50%. Most lenders consider that too high, and so do the credit scoring models. The Consumer Financial Protection Bureau recommends that you keep this number below 30%, the lower, the better.
- Age of credit. When you have a longstanding history of responsible credit management, it reflects well on your creditworthiness. Keep open revolving credit accounts that you have had for a long time, and consider applying for new credit thoughtfully, as the new line of credit could lower the average age of your credit overall.
- Credit mix. Consider your mix of revolving and installment credit lines, such as credit cards and personal loans (respectively). If your credit leans heavily toward one or the other, you might want to balance that credit mix with a type of credit you don’t have.
- Number of inquiries. When you apply for new credit, the lender typically runs your credit. This shows up as a hard inquiry. Each hard inquiry can dock your credit score a bit, and a lot of hard inquiries in a short period of time can have a bigger impact. When you are considering new credit, carefully plan out when you allow lenders to pull your credit.
If you follow the tips above, you can slowly work toward better credit on your own.
Disputing Incorrect Items on Your Credit Report
Another way you can work on DIY credit repair is to send dispute letters to the credit bureaus about inaccurate negative information on your credit reports.
You can actually dispute any inaccurate information on your credit reports. Some examples include incorrect addresses or the spelling of names. However, these personal details wouldn’t impact your credit.
When repairing your credit, look for items that would lower your score, including:
- Inaccurate late payment information
- Balances that are reported too high
- Accounts that aren’t yours
- Hard inquiries when you didn’t apply for any credit
If you see any of this type of information on your credit report, send a dispute letter to the bureau in question. You’ll need to check your credit with all three major bureaus and dispute any negative information with each. The bureaus don’t share this type of information with each other. In fact, your credit report may not even be the same at all three bureaus.
Get Your Free Credit Score
The place to begin credit repair is to find out what your credit is and what’s bringing it down. Under the FCRA, you’re legally entitled to obtain a free credit report every 12 months from each of the major credit bureaus, make sure that all information is accurate, and fix any mistakes. Through Credit.com you can get your Experian Vantage 3.0, credit score free every 14 days. Monitoring your credit score and credit report regularly can help you see how your credit repair efforts are working and what you still need to fix.
Affiliation disclaimer: John C. Heath, Attorney at Law, PC, dba Lexington Law Firm contracts with Progrexion Holdings, the owner of Credit.com, to provide administrative and business support. Credit.com may receive compensation if a subscriber signs up for Lexington Law Firm services.
