If you would like to jump down to specific topics then use the following table of contents to take you to the part of the page you need more information for:
– What is credit repair?
– How does credit repair work and is it effective?
– What to do for fast credit repair
– What to do after you establish good credit
– What to do if you are trying to repair your credit for the long run
– Steps to order your free credit report
– Review your credit report for errors
– Do-it-yourself credit repair: correcting credit report errors
– Credit counseling
– Credit repair services
– Using credit repair services
– Your credit repair rights
– Does free credit repair exist?
– Credit repair cautions
– Consumer complaints
What is credit repair?
Without sugar coating it, credit repair is the process whereby a consumer hires a third party company to act as their proxy and attempt to get negative information removed from their credit report.
The companies that provide these services are formally referred to as “Credit Repair Organizations” by the Credit Repair Organizations Act (hereinafter referred to as “CROA”), the Federal law that controls their advertising, billing, and contractual activities.
The traditional strategy of a credit repair organization is to send dispute letters to the credit bureaus challenging the validity of negative items.
Their hope is that either the credit bureau or the party furnishing data to the credit bureau (a lender or collection agency) drops the ball and doesn’t get the offending credit entry validated within the requisite 30-day period, and then has to remove it. If the item is validated as accurate the credit repair organization will simply re-dispute the item and the process starts over.
How does credit repair work and is it effective?
The answer to the question about the effectiveness of credit repair services is going to vary wildly depending on whom you ask. According to Mike Citron of DisputeSuite, “Credit repair companies get millions of inaccurate items removed from consumer credit files every year.”
Are they effective? “The answer is undoubtedly yes. Our users have noted over 302,000 deletions in the first half of the year.” Lexington Law, a credit repair law firm, has statistics on their website that suggests they were able to get over 2.5 million items removed in 2011 and almost 780,000 items removed in the first quarter of 2012.
So, if you consider “deletion” to be synonymous with “success,” and in credit repair that is the bottom line, then the practice does appear to be effective.
What to do for fast credit repair
When it comes to credit, most people fall into one of three groups. You’re either trying to build credit for the first time, maintain your existing credit score or bring bad credit back from the brink.
Regardless of what your goal is, you’ve got to have a solid plan for reaching it.
We’ve got a road-map for every stage of the way so read on to find out how to get there. Before you start with our road map, the first thing to do is to monitor your credit score regularly and review your Credit Sesame credit report cards to understand the factors and behaviors that affect your credit score.
To build a credit score, you need to get some credit but if it’s early in the game your options might be limited.
Here are four ways you can get the ball rolling:
1. Try a credit builder loan
A credit builder loan is a short-term loan that you can use to establish credit. These loans are offered by banks and credit unions and they’re typically for a small amount, usually no more than $1,000.
Instead of actually getting the cash in hand, it’s parked in an interest-bearing account. Once you pay the loan off, you’ll get the money back along with any interest earned. Not only that, but you’ve also built up a positive payment history in the process.
2. Get a secured credit card
A secured credit card is a stepping stone to building credit. With this kind of account, you have to put up a cash deposit to get the card.
You can use a secured card to build credit, but they’re not hassle-free. These cards tend to charge higher interest rates and fees compared to traditional credit cards, so review the rates and costs carefully before you settle on one.
3. Ask to be an authorized user
An authorized user is someone who has charging privileges on someone else’s credit card account. You get your own card with your name on it and you can reap some positive credit benefits even if you don’t use it.
The reason? The original cardholder’s account history for the card will get transplanted onto your credit report. If they’ve always paid on time and kept the balance low, it’ll help to bump up your score. Choose your credit card partner carefully. If that person pays late or carries a high balance, your credit will suffer.
4. Open a store credit card
If you’ve ever been shopping at a major retailer you’ve probably been offered a store credit card at some point. These are cards that are branded to specific stores like Macy’s or Target.
These cards have some drawbacks, since they usually have higher APRs and lower credit limits, but they’re great for newbies who are trying to build credit. It’s usually easier to get approved for a store card, even if you have a lower credit score.
The fact that you have limited charging power is also a plus since it keeps you from getting in over your head with debt. Just remember to pay your card off in full each month. Lower use will protect your score and lower interest charges will protect your finances.
What to do after you establish good credit
Once you’ve gotten your credit established, you can’t just set it and forget it. If you’re ready to amp up your score by 100 points or more, here’s what you need to do next.
1. Wipe out your credit card balances
The fastest way to send your score shooting up is to pay off your credit card debt. Carrying too much debt drags down your credit utilization, which is how much of your total credit line you’re using.
The lower your balances are, the better where your score is concerned. People with top credit scores use about 7 percent of their available credit.
2. Ask for more credit
You can also improve your credit utilization by asking for a limit increase. This is tricky, however, since your credit card company might want to pull your credit report before they approve you. Every time a lender checks your credit it can knock a point or two off your score so avoid a new inquiry if you can.
Most important, don’t increase your spending to match the credit line increase. If your utilization shoots up to match the new limit, you won’t have helped your score at all, and you’ll be in a deeper debt hole.
3. Keep your accounts open
Once you pay off your cards you might want to close them. But that could be a mistake. Part of your credit score is based on the average age of all of your accounts. The older, the better. Keep accounts open. You may need to occasionally make a purchase on an old card to avoid having it closed by the issuer for inactivity.
4. Slow down on new credit applications
Every time you apply for a new card, a new inquiry hits your credit report and your score could drop by a few points. Further, most creditors don’t like to offer credit to consumers who have applied for numerous new accounts. Such a consumer looks desperate and more risky.
To keep your credit score from slipping too much, scale back on how often you open new accounts.
What to do if you are trying to repair your credit for the long run
Plenty of life’s events can cause your credit score to tank, but it’s never the end of the world, nor even the end of your credit life. Anyone can work back to a good score. You just need to know what to do.
If you filed bankruptcy or lost a home to foreclosure, the cause of your bad credit is pretty clear cut. In other cases, the negative factors aren’t as obvious.
That’s why it’s so important to know what’s on your credit report. Perhaps you missed an error, or maybe someone is opening fraudulent accounts in your name, or it could be that your credit utilization is too high. All of these can bring your score down, but the solutions are very different. You need to know what’s there before you can take steps to fix it.
1. Bring past due accounts current
Your payment history is the single most important factor that impacts your credit score. If you’ve got bad credit because you missed payments or paid late on one or more of your accounts, the best way to fix the damage is to consistently make your payments on time starting now.
If you have bills outstanding, call up your creditors and work out a payment plan. The faster you can get things caught up the easier it is to move on to the next step.
Pay off collections, too. The newest credit scoring models ignore paid collection accounts but penalize you for unpaid collections.
2. Put your bills on autopilot
Once you’re current on your bills, don’t fall behind again. Setting up automatic payments through your bank is one way to keep track of your due dates. You can also link up your accounts to a bill pay app like Prism Money or a budgeting app like Mint to get reminders of when your bills are due.
Working towards good credit isn’t a once and done thing. Consumers with healthy credit practice good financial habits on a regular basis. Wherever your score falls on the credit scale, the key to moving up is to work your plan consistently.
3. Fix and dispute errors on your credit reports
If you’re shopping for a new car loan, mortgage or credit card, an error on your credit report can be costly. According to the FTC, one in four consumers has errors on his or her credit reports, and a significant number of those errors are serious enough to affect the consumer’s credit score. In fact, the FTC study says approximately one in 20 consumers had errors that resulted in losing more than 25 points from their credit score.
When you apply for credit, just one point can knock you below the lender’s threshold for the best terms, or for approval at all.
Experts say a majority of consumers aren’t aware of credit report errors until it’s too late.
4. Do not avoid credit
Who doesn’t want to pay off their student loans, mortgage or credit card debt? Living debt free is great, and it should be your number one financial goal. At the same time, responsible use of credit (meaning you keep debt low and you make on-time payments) will improve your credit score and establish a strong credit history. Most of us need credit at some point in our lives. If you live without credit, new creditors have no way to gauge the level of risk you represent to them. Without a credit history, how will the creditor know whether you’ll repay your debt? So don’t eschew all forms of credit. If you do, when the time comes that you want or need it (such as your trusty car dies and you need a loan to purchase a new one), you’ll have a more difficult time getting approved. You’ll pay a higher interest rate, too.
Steps to order your free credit reports
By law, the Fair Credit Reporting Act entitles everyone to one free copy of his or her credit reports from each of the three credit reporting agencies (TransUnion, Experian and Equifax) once a year. To order your free credit reports simply visit www.AnnualCreditReport.com.
The three main credit reporting agencies are separate companies and do not share their data. Some creditors report to all three, others report to just one or two. Check all three of your credit reports for errors. If you do find errors, file a dispute directly with the credit reporting agency where the error is reported.
Review your credit reports for errors
Once you’ve obtained copies of your credit reports it’s time to review them for errors. Each of your credit reports is broken down into the following sections:
1. Identifying information. This is where your name, address, date of birth, Social Security number and other identifying information is listed. Most reports also have a section for “aliases,” or other names, such as names with or without a middle initial, and maiden names.
Be sure the information is accurate. If it is not, your report might reflect debts that are not yours.
2. Creditor information. This section lists any current or previous credit accounts you have had, with information about the lender, how much you owe, whether the account is current or past due, whether it is open or closed, and other status information. Accounts include mortgages, revolving accounts like credit cards and installment loans like student and auto loans.
Ensure that each account belongs to you and that all information is accurate and up to date. Some common errors are misreported late payments or payments inaccurately shown as missed.
3. Collection accounts. This section shows delinquent accounts that are in the collection stage. If you don’t have (or never had) any accounts in collection, this section should be empty or might not appear on your report at all.
If an account listed is not yours, or you paid off an account but it still appears on the report as unpaid, dispute the item. It helps if you have proof that the account was paid off.
4. Public records. This section contains public financial records such as bankruptcy, judgments, liens and overdue child support.
If you have had a serious financial problem and/or bankruptcy filing, it could remain in this section for seven to 10 years.
Do-it-yourself credit repair – correcting credit report errors
If you find errors in your report, the Fair Credit Reporting Act requires credit bureaus to provide a procedure for disputing them. The easiest way to file a dispute is online, directly with each of the credit reporting agencies on their websites.
However, the easiest way isn’t always the most effective way.
For one, the online dispute process provides a limited number options for explaining the reason for disputing the error. There are also character limits to how much you can write to explain your dispute. In some cases, you’ll need to dispute the error by certified mail. If you do make a dispute by mail, keep your original documents and send in copies. Keep a copy of all correspondence and documentation related to the error and dispute.
Credit repair letters for disputes
When you file a credit report error dispute the old fashioned way, via regular mail — certified, return receipt requested so that you have proof that the dispute was received — you can send copies of any evidence proving the error (cancelled checks, a letter from a collection agency saying a debt is paid, etc.). Free credit repair dispute letters are available around the web that you can look at and download. The FTC offers a sample dispute letter on their website. You will need to modify any form credit repair letter to fit your own situation.
When you send the dispute be sure to clearly identify the item that you are disputing and the reason a correction is warranted. You may also wish to enclose a copy of your report with the item in question circled to help the bureau quickly identify and investigate the error.
Once the credit bureau receives your dispute, it will open an investigation with the lender or creditor that reported the error. By law, the creditor must investigate the dispute and report its results to the credit bureau within 30 days (15 additional days are given to the creditor if you provide additional documentation during the initial 30-day time frame). Some states may require a faster response. If there was an error, the creditor must send correction updates to all three credit bureaus. If the creditor does not respond within the time allowed, the credit bureau should remove the item from your credit report and then do its own investigation, which can take another 30 days. After that investigation is complete, the bureau will mail you its results.
(Note that according to the FTC, the furnisher of negative information is NOT obligated to investigate a dispute “submitted by, prepared on behalf of the consumer by, or submitted on a form supplied to the consumer by a credit repair organization.”)
If a creditor submits a correction, you have the right to ask that correction notices be sent to anyone who received your report in the past six months.
If an investigation does not resolve your dispute, you can draft a statement of dispute and ask the bureau to include it in your file and in future reports.
Make sure to verify the fix. “Monitor your report to ensure the bureaus correct each error,” says Todd Huettner, a mortgage broker in Denver, CO. “And get a dated letter on the creditor’s letterhead including their address, phone number, a contact name and explanation of the error and resolution for your files in the event you need it as proof down the line.”
Credit counseling
If tackling credit repair yourself seems overwhelming or confusing, you can get help. Free and low-cost counselors are available nationwide to meet with you in person or by phone. They can help you with credit, debt, bankruptcy, housing, reverse mortgages, student loans and general financial education. The counselor will review your situation, help you determine your best course of action and guide you through the process.
To find a credit counselor near you, visit the National Foundation for Credit Counseling at NFCC.org.
Credit repair services
Many consumers turn to credit repair companies to fix their credit. The problem is they might pay too much and get far too little.
“You do not need to pay someone hundreds or thousands of dollars to fix your credit, you simply need a plan to fix it yourself,” says Huettner.
Many of the popular fee-based credit repair companies repair scores by disputing every derogatory item on your credit report, essentially bombarding the credit bureaus with dispute letters. If the company who put the derogatory item on your credit does not reply within the 30 day time frame outlined under the law, and provide proof that the negative item is in fact accurate, they have to remove the derogatory data.
Huettner says there are several problems with this approach.
“This is a shotgun approach that is often unsuccessful and you then have to remove all the accounts in dispute on your credit report to get a mortgage loan because you cannot have any accounts in dispute and get approved for a loan,” he says.
Despite what many credit repair companies promise, the credit bureaus are under no obligation to remove accurate negative information from your credit reports. If the negative information is accurate, it will remain in your credit reports until it expires (seven to ten years). And if you dispute every negative item in your credit reports, even those that are accurate, the credit bureau may flag your disputes as “frivolous” and ignore future disputes from you.
The bottom line? Educating yourself about credit is the best long term solution. You don’t have to pay a company to repair credit for you. You can fix it yourself! It just takes time and know how.
Using credit repair services
Our credit expert, John Ulizheimer, has answered questions about whether or not credit repair services work, are legitimate and are worth the price. Credit repair is certainly a lightening rod topic. The Federal Trade Commission and the credit reporting industry don’t have high regard for credit repair businesses. Conversely, credit repair organizations say they get a bad rap, and that their services are valuable.
Your credit repair rights
When it comes to credit repair, the consumer has certain rights. The credit repair company must explain:
-Your rights (in writing) and the work they will perform
-Your right to cancel within three days at no charge
-How long it will take to get results
-The total cost you will pay
-Any guarantees
A credit repair company may not:
-Promise you a new “credit identity”
-Charge you for work before it is completed
-Instruct you not to contact the credit bureaus yourself
-Instruct you to dispute accurate negative items on your credit report
-Instruct you to give false information on a credit application
-Neglect to tell you your legal rights
The consumer pays the credit repair agencies in one of three ways:
1. Subscription. The credit repair company will get a credit card number from you and keep it on file. Every 30 days they’ll charge you an amount to cover the work performed during the previous month. That amount varies from company to company but it is usually in the $29 to $79 range.
2. Flat Fee. The credit repair company assesses the amount of work they believe they’ll have to do for you and charges one lump sum fee when the work has been completed.
3. Pay-per-delete. Pay-per-delete is, as it sounds, an agreement to pay the credit repair company on a line item by line item basis as items are removed from your credit reports. The company cannot legally charge the consumer for services until after those services are rendered.
Does free credit repair exist?
We get this question a lot. Free credit repair services don’t exist. The closest thing is free credit counseling, which we covered above. Credit repair organizations will give advice and inform your about their programs, but that’s as far as you will get without paying anything.
Free credit repair is on the consumer, and it’s the most valuable type of credit repair out there. If self-education isn’t a viable option, sign up with an NFCC counselor. You can repair your credit, especially once a knowledgeable professional shows you how.
Credit repair cautions
The Federal Trade Commission has pulled no punches when it comes to credit repair. They describe credit repair companies as “credit repair scams” and strongly warn consumers not to use their services.
The Consumer Data Industry Association (CDIA), the trade association of the credit reporting agencies, also has issues with credit repair. Stuart Pratt, President of the CDIA, has said that credit repair companies try to “break the system” by flooding the credit reporting agencies with dispute letters that “most often end up in failure.”
Pratt also says that around 30 percent of the disputes received by the credit bureaus are generated by credit repair organizations.
The two most compelling arguments against credit repair:
You may be breaking the law. According to the Federal Trade Commission, “It’s a federal crime to lie on a loan or credit application, to misrepresent your Social Security number, and to obtain an Employer Identification Number from the Internal Revenue Service under false pretenses. You could be charged and prosecuted for mail or wire fraud if you use the mail, telephone, or Internet to apply for credit and provide false information.”
These comments address a particularly nefarious credit repair strategy whereby the credit repair company tries to convince you to use an EIN (also known as a tax ID), rather than your Social Security Number, to establish a new credit history. Tax ID numbers, like Social Security Numbers, are also 9 digits.
The substitute identification number is sometimes called a Credit Privacy Number. The number might actually be a stolen Social Security Number that belongs to someone else. If that is the case, you’re committing identity theft if you use it.
You can do it yourself for free. There is no charge if you want to submit a dispute to the credit reporting agencies, other than the commitment in time. The credit repair counterargument is that you can also do your own taxes, cut your own hair and change your own oil, but that you might be better off letting a professional handle the task.
There is no data to suggest that professional credit repair is any more or less effective at getting negative information removed from your credit reports than self credit repair.
Consumer complaints
If you think consumers are filing countless complaints against credit repair scammers, that is not the case. According to the Federal Trade Commission’s 2011 Sentinel report, credit repair complaints make up no more than 3% of the complaints to the FTC, the FBI’s Internet Crime Complaint Center, the Better Business Bureau, the US Postal Service, the Canadian Anti-Fraud Centre and several state agencies.
Even for that report, credit repair was lumped together with several other types of complaints.
Protect your credit, and arm yourself with the knowledge of who can help when you need it.
