A series that debunks popular money misconceptions.
Credit card debt is directly tied to financial health. It can build up quickly and can be hard to get rid of. A low score can prevent you from getting the best rates on loans, like mortgages or car loans. It can also affect insurance premiums.
Some companies offer to raise one’s credit score in a short amount of time, for a fee. But are they legit? Here’s what you need to know about credit repair companies.
What are credit repair companies?
Credit repair companies aim to improve one’s score by disputing their credit report. They start by reviewing reports from the major credit bureaus: Equifax, Experian and Transunion. These companies then draft disputing letters objecting to damaging items on the reports. If an item can’t be verified by the bureau, it’s removed. The credit bureau typically has 30 days after receiving any disputes to investigate and verify the information. These types of companies often charge a start-up fee, along with a monthly fee.
Scam credit repair companies say they can get people out of debt and improve their credit quickly. But some extort customers by requesting payment upfront, which is illegal, and then don’t deliver the promised results to the customer.
These scams are everywhere. In 2016, the Consumer Financial Protection Bureau reported half of the complaints it received about credit repair involved fraud.
“As long as there have been people in debt, there have been people trying to take advantage of them,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. “When people are desperate and scared, it’s when the scammers come out, because that’s what they prey on.”
While credit repair scams have been around forever, it’s now easier for them to target consumers with poor credit or a lot of debt. Rheingold said scammers often buy information from credit bureaus.
Customers can avoid a scam by doing their research. Look up the credit repair companies online and read reviews. Be on the lookout for companies rated by the Better Business Bureau or backed by a membership organization, like the National Foundation for Credit Counseling.
Companies who promise to erase debt or boost your credit score quickly are likely scammers.
In other words, if it sounds too good to be true, it probably is.
“If you see an ad on late-night TV, don’t contact them. If you receive an email from someone targeting you, I would stay away,” said Rheingold. “If someone is contacting you directly, I would run the other way.”
Improving credit the right way
The first step to take stock of your debt situation, including how much debt and what types of debt you have, said Thomas Nitzsche, a spokesman for Money Management International. He recommends researching your options before making a decision.
If you need assistance getting out of debt or repairing your credit, here are some valid options.
Debt management organizations These are nonprofits and government organizations dedicated to helping consumers get out of debt. They work for free to educate consumers about credit management and how to pay down debt. Money Management International represents a network of these types of nonprofits. Nitzsche said his main job is to “set realistic expectations” about how long debt management can take, typically anywhere from a couple of months to a couple of years.
“People often wait until the moment of crisis to call us,” he said. “If you’re trying to get a mortgage approved next week and want a higher credit score, that’s probably not going to happen. We reset those expectations for them.”
Credit counseling Chances are, if one’s credit score is low, they also have some debt. While hiring a credit counselor often isn’t free, they can give help you understand the source of the debt and help establish a plan to get out. Before hiring a counselor, check to make sure they are legitimate via the National Foundation for Credit Counseling.
Credit counselors typically either charge a flat fee up-front or on a monthly basis. Some may not even request payment until they deliver results.
Debt settlement companies These companies work with a customer to determine how much debt they owe. Customers then typically stop paying the debt and instead pay smaller increments directly to the debt settlement company. Eventually the company will contact the creditor and settle the debt at a lower price.
But, “it can be quite damaging to one’s credit score if you stop paying off your debts, even if for a short period of time,” said Nitzsche. “It’s best to take this route only if your account has already gone delinquent.”
Creditors aren’t under any obligation to settle and may refuse to do so, leaving customers in a worse place then when they started. Nitzsche recommends finding a safer alternative to deal with your debt.
Debt settlement companies are for-profit companies that say they can eliminate consumers’ debts by negotiating settlements with creditors that are a mere fraction of the consumer’s outstanding debt. Many of these companies accomplish little for consumers and charge hefty fees.
How to fix credit yourself
Keep in mind it can take time to build credit back up, but there are simple ways to give it a boost in less than a month, like disputing any errors or paying off balances.
Nitzsche recommends going through your credit report, because “most people don’t even know what’s on it.” We have a guide to reading a credit report here.
The worst thing you can do is nothing, said Rheingold.
“Ignoring debt is a really bad thing. People would come in my office with plastic bags filled with unopened bills because they knew what was inside and didn’t want to deal with it,” he said. “The sooner you deal with the issue, the better.”
Want more money explainers in your inbox? Sign up for the Policygenius newsletter.
Image: Phillip Blackowl
Get essential money news & money moves with the Easy Money newsletter.
Free in your inbox each Friday.