Should You Pay to Remove Bad Credit?

Or are you throwing good money after bad?

An overhead photograph of a trio of telemarketers seated at a long desk, typing and answering the phone.
•••

Dean Mitchell / Getty Images

If you’re struggling with bad credit, you may be tempted to pay to have negative information deleted in order to clean up your credit. In many cases, though, that’s unlikely to work and you will waste money that could be put to better use as you rebuild your credit. 

Pay to Delete

The basic approach with “pay to delete” is that you offer to pay a collection agency or other company reporting negative information on your credit reports in exchange for removal of that information. Another approach is to pay a credit repair firm with the hope that it can successfully get negative information removed from your reports. 

The Fair Credit Reporting Act (FCRA), the federal law that governs consumer credit reporting, does not expressly prohibit the practice, since credit reporting is ultimately a voluntary system. However, the Consumer Data Industry Association (CDIA), the organization that represents credit reporting agencies and maintains the guidelines for reporting consumer credit data, prohibits companies that report credit data from removing negative information in exchange for payment in an effort to maintain the accuracy and integrity of credit reports.

 

Removing Collection Accounts

In recent years, at least two large collection agencies—Encore Capital and PRA Group Inc.—have adopted policies that result in the removal of collection accounts for customers who resolve their debts or who enter into payment arrangements and then make payments on time. It is unclear at this point whether these practices will spread among other collection agencies, or whether the practice will be quashed by those within the industry, but as it currently stands, millions of collection accounts have been removed because of these policies.

 

If you have collection accounts on your credit reports, you can certainly ask the collection agency if it will stop reporting the account if you pay it off, but they are under no obligation to do so, and their contracts with the credit bureaus prohibit that practice.

Credit Repair 

Credit repair firms often promote their ability to get negative information removed from credit reports. They do this by disputing negative information in the hopes that it will not be verified and will be removed. Under the FCRA, if an item a consumer disputes with the credit reporting agency is not confirmed with the source reporting it—the lender or collection agency, for example—it must be removed. The credit repair organization is playing a numbers game, hoping that some disputed items will be removed because they are not verified.

Sometimes they are successful in getting some items removed, but many times the original furnisher of the data will confirm it and it will continue to be reported. 

Under federal law, credit repair organizations are prohibited from charging consumers before services are performed. However, some consumers have paid hundreds, or even thousands, of dollars and did not get the desired results. If you decide to hire a credit repair firm, make sure you screen them carefully. You are entitled to a written contract, including certain rights to cancel that contract. 

It’s also worth noting that you can dispute items on your credit reports yourself for free. You can order your credit reports each year for free at AnnualCreditReport.com. The FCRA then gives you the right to dispute any information you believe is inaccurate or incomplete. You can file your dispute online or in writing. 

Rebuild Your Credit

Removing negative information from your credit reports isn’t the only way to restore your credit. You may also be able to raise your credit scores by adding positive references to your reports. 

  • Secured credit cards are a popular option for those with low credit scores. With one of these cards, you place a security deposit with the issuer and get a credit card with a credit line that is typically equal to the deposit amount. The bank reports your payment history, monthly balances, and other details to the credit bureau. To improve your credit make your payments on time and keep your month-to-month balance low (paying your card in full is best).

A secured card is not the same as a prepaid card. With a prepaid card you spend money you load on the card. Those cards function like debit cards and are not reported to consumer credit bureaus.

  • Credit builder loans allow you to “borrow” a savings account. You make payments toward the balance and when that account is paid in full, you have access to the funds in the savings account. The bank reports your payment history and “loan” details to the credit bureau. As with a secured card, on-time payments will improve your credit score.

Most secured credit cards and credit builder accounts report to the major credit reporting agencies. If you pay those accounts on time each month, you will add build positive credit references to your credit reports. Over time, these can help boost your credit scores.