Credit Repair: What It Is, How It Works, Related Services

What Is Credit Repair?

Credit repair is the process of fixing a credit history that has one of more problems, such as errors, identity theft, or actual delinquencies and similar issues. Repairing credit may be as simple as disputing mistaken information with credit agencies, while damage incurred from identity theft may require extensive work. Credit repair may also involve dealing with fundamental financial issues, such as budgeting, and addressing legitimate concerns on the part of lenders.

How Credit Repair Works

Correcting erroneous information on credit reports takes some time and effort. In general, accurate information can't be removed from credit reports, although there are some exceptions to this (via goodwill letters and pay-for-delete). However, credit report information and accounts can be disputed if they are misrepresented or inaccurate.

The credit repair process requires reviewing your credit reports for details that are bringing your score down, and addressing each of those issues—whether that means sending in disputes or reducing your credit utilization.

You're entitled to free credit reports every week from the credit reporting agencies (from AnnualCreditReport.com) and when an adverse action is taken against you, such as being denied credit based on information in a credit report. There are also a variety of credit monitoring services you can use, some free and some not, to keep tabs on your credit.

Understanding what makes a good credit score is key to repairing your credit. The following factors are used to calculate your credit score:

• Payment History (35% of a FICO score): Making consistent, on-time payments is the most important way to build and maintain good credit. Late payments and delinquent accounts can have a severe negative impact on your credit score.
• Amounts Owed (30% of a FICO score): This category looks at the amount of revolving debt you owe (like your credit card balances) compared to your total available credit. This is known as your credit utilization ratio. The lower your credit utilization, the better it is for your credit; aiming for 30% or less is best. Try to avoid maxing out your credit cards, and if you do, consider paying them off before the end of the statement period to reduce your reported utilization.
• Length of Credit History (15% of a FICO score): In general, the longer your credit history, the better it is for your score. This category looks at the average age of all of your credit accounts, the ages of your oldest and newest accounts, how long certain credit accounts have been established, and how long it's been since you used certain accounts. Keeping accounts open and not applying for a lot of new, unnecessary credit can help you earn points here.
• New Credit (10% of a FICO score): Opening a lot of accounts in a short period of time can hurt you in this category because it can indicate a greater risk for lenders.
• Credit Mix (10% of a FICO score): The more variety you have on your credit reports, the better it is for your score. This can include installment loans, credit cards, retail accounts, mortgages, and finance company accounts, although you don't need all of those to have good credit.
  

Credit Repair Services

There are thousands of credit repair companies. They all perform basically the same service, but a given company may only deal with certain credit problems, and they all have different fees. There are generally two types of fees: an initial setup fee and a monthly service fee. Based on Investopedia's research, some companies don't have an initial fee; when there is an initial fee, it can often be up to $100. The monthly fee typically runs between $50 and $100 a month, although some companies do charge more.

Credit repair companies can't do anything you can't do yourself—they don't have any special dispute privileges that you don't have. However, just as anyone could do their taxes themselves, many people choose to hire a tax professional to help. The situation is similar with credit repair and credit repair companies.

If you're unable or unwilling to spend that time, do your research to ensure you'll be working with one of the best credit repair companies.

Frequently Asked Questions (FAQs)

The Bottom Line

Credit repair is the act of restoring or correcting a poor credit score, either by disputing incorrect items (yourself or with the help of a company) or by correcting certain financial behaviors.

Keep in mind that credit repair firms can’t legally do anything for you that you can’t do for yourself. However, repairing your own credit can be labor-intensive and time-consuming, so it can often be worth hiring a reputable credit repair company.