A common question I’ve heard during my 25+ years in the consumer credit industry from consumers trying to repair or rebuild their credit is if paid credit repair services are worth it. Such services generally promise that they can remove errors and negative items from your credit report…for a “small fee” of course.
These services have come into the spotlight recently due to a ruling by the Consumer Financial Protection Bureau, which found that some credit repair firms were charging illegal and/or upfront fees. The proposed order requires the defendants to pay $3 million, which isn’t exactly chump change.
You may have seen such services advertised online (several national companies market quite aggressively) or you may have even seen yard signs locally that seem to clutter the sides of our roadways – at least where I live. Such ads normally promote guaranteed credit repair and portray debt collectors as dragons that need slain. They also tout the financial benefits and freedom of having a good credit score.
Undoubtedly, having a good credit score has many financial benefits and can save you hundreds, if not thousands of dollars, in finance charges and/or insurance premiums. There is also little doubt that some debt collection agencies are evil. However, the answer to the question of whether you should hire a company is well…a bit more complicated.
The short answer is it depends, but generally not. But let’s explore this topic in more detail and discover the pros and cons of such services. The goal here is to help you to determine if a paid service is a good fit for you.
What are credit repair services?
As you might expect, the target demographic for these services is consumers with poor credit. According to Experian, 16% of consumers have FICO® credit scores in the very poor range.
According to Michael Bovee, founder of the Consumer Recovery Network, a debt consultation service, credit repair services help to identify problem areas on your credit reports and work to get those corrected so that your reports reflect accurate, complete, and current information.
This process includes the following steps:
- Removing incorrect addresses, inaccurate accounts and payment details.
- Disputing items that should have already aged off your credit, or that should not have been there at all.
John Ulzheimer, president of The Ulzheimer Group and founder of CreditExpertWitness.com, adds that credit repair is actually a legally defined term and “service.” He adds that any for-profit company that provides a service with the implied purpose of improving someone’s credit reports or credit scores is a credit repair organization.
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It should be noted that the phrase poor or bad credit should not be confused with the phrase “no credit.” If you have never established credit, you will have no credit score and thus will not need any type of credit repair service. Your focus should be building a positive credit history instead.
How do credit repair services work?
While each company has a slightly different approach, most companies have a similar strategy that typically involves disputing negative information on your credit reports from each of the three major credit bureaus. Ulzheimer notes that disputes are normally resolved by mailing letters to each of the three bureaus.
Bovee acknowledges that “credit repair is predominately viewed as an exercise in getting harmful things removed from your credit.” The goal here is to give your credit score a boost since such negative elements normally lower your score.
The process usually involves the following steps:
- After signing up, a reputable service will typically examine your reports for free and make suggestions on which items to dispute. Alternatively, you can suggest items to dispute that you don’t recognize or that appear to have inaccurate info.
- Next, the firm will begin the dispute process by working with the credit bureaus (that compile your reports) on your behalf and/or working with your creditors.
Even if a company successfully gets an item removed from your reports, you should be aware that the removal can sometimes be temporary, according to Bovee. This is partly because there is a 30-day credit bureau investigation window where, if they do not hear back from the creditor in question that is under dispute within 30 days, the bureau must remove the item in question until the investigation can be completed. Once the investigation is complete, though, the item may show back up on your report(s) if it’s proven that your debt is legit and accurately reported.
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Beware of unethical or outright scams before you pay someone to fix your credit! While inaccurate or erroneous information should be disputed (and you have a legal right to do so), the credit repair industry has a bad reputation of disputing accurate information as well.
Lynnette Khalfani-Cox, author of the NY Times bestseller “Zero Debt: The Ultimate Guide to Financial Freedom” and affectionately known as the Money Coach, explains that reputable repair companies can be found by researching and checking for accreditation with the Better Business Bureau (BBB) or the National Foundation for Credit Counseling (NFCC). She adds that it is also important to check out consumer reviews from past or current clients and to beware of companies that promise quick fixes to your credit or ask for upfront fees (see below).
How much does credit repair cost and how are fees charged?
Credit repair companies charge varying prices for their services and have different fee structures. Bovee claims that a common fee is $100 a month while they send dispute and investigation request letters to the bureaus on your behalf.
Ulzheimer opines that fees are either charged as a monthly fee or “pay per deletion,” where the fee is charged “if the company is successful in getting something removed.” He adds that “the fees are almost always paid with a credit card.”
Bovee sternly warns that you should never pay in advance, explaining that charging fees in advance of a company being able to show the efficacy of their work is a problem based on laws that prevent that.
Some of the largest credit repair companies in the U.S. were recently shown to have charged fees in advance of delivering positive outcomes for their customers. They were banned from telemarketing credit repair for a decade and fined billions of dollars.
On a positive note, Bovee adds that a good credit repair business model should only charge a fee after they can show they were able to get something corrected or removed from your credit, and that it stayed that way for at least six months.
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The Credit Repair Organizations Act (CROA) helps protect consumers. For instance, according to Khalfani-Cox, if you sign up with a repair firm, you have three days to change your mind and cancel without any charges whatsoever.
Are credit repair companies worth it?
Most consumer advocates, myself included, believe that the short answer to the question of whether these services are worth it for most consumers is “no” with a couple of notable exceptions:
- You are really busy and/or don’t have the time or interest in disputing wrong information in your reports using a DIY approach (see below).
- Boven opines that another reason is if you need an experienced Fair Credit Reporting Act (FCRA) consumer law attorney to advance your goals with accurate credit reporting (this situation is rare).
The main reason that repair services aren’t worth it is because it’s relatively simple and also free to handle things yourself. Bovines points out that “there are many DIY Credit Repair guides available, and it doesn’t take too much time for people to follow those tips on their own. The companies aren’t doing anything you cannot do yourself.”
Bovee has a broader view of how the repair process should work. He prefers to view it not as a “get stuff removed process,” but as more of a “get good information added (to your reports) process.” He further explains that correcting inaccuracies is sometimes the smallest part of the process.
Want more DIY tips? The CardRatings “How to repair your credit” guide is a great primer.
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Got debt? Bovee suggests that you focus on your debt first and foremost. He declares that with over two decades of helping consumers resolve debt problems, that it’s best to resolve past debt issues before trying to rebuild or repair your credit. Paying down debt can also help boost your credit score.
Final thoughts
While paid credit repair isn’t always a scam and may benefit a minority of consumers, it’s not the best option for most. If you decide to hire a firm, please proceed with extreme caution and make sure you’re only paying for actual results that last long term (at least six months). My mantra that “an educated consumer is an empowered consumer” certainly applies here.
