What You Need to Know About Credit Repair
Know These 9 Critical Facts About Mending Your Credit
It's difficult to navigate today's society with bad credit. A number of companies use your credit to decide whether to do business with you and to set the pricing for products and services you use.
Consumers with a troubled credit history often seek credit repair to improve their financial situation. As you evaluate your options, here are the most critical things to know.
1. You Can Do It Yourself
While a reputable credit repair company may be an option for some people, there's nothing they can do for you that you can't do for yourself. There's plenty of information available in books and on the internet that you can use to educate yourself on how credit works and what you can do to repair your own credit.
Removing negative information, for example, can be done with techniques like credit report disputes, debt validation, pay for delete, and goodwill letters—the strategies credit repair companies use to get negative information removed from your credit report.
Doing it yourself not only saves you money but also gives you power and control over your credit history. Once you know the credit repair tactics, you can use them anytime in the future if it becomes necessary.
2. It's for Your Credit Report, Not Your Credit Score
Your credit score is influenced by the information on your credit report. This is why checking your credit report is the first step to repairing your credit.
In response to the COVID-19 pandemic, free credit reports through AnnualCreditReport.com are available every week vs. once a year.
3. Your Credit Score Shows Where Your Credit Stands
Pay attention to your credit score; it can tell you whether your credit is good, bad, or improving. A low credit score indicates a poor credit history that needs work. As your credit score improves, it's an indication that your credit history is improving.
Purchasing your credit score each time you want to see where you stand can get expensive. Using a free credit score service like Credit Karma or Credit Sesame will allow you to monitor your credit progress at no cost.
When you're signing up for a credit monitoring service, look for one that doesn't ask for a credit card. Otherwise, there's a chance you may be actually signing up for a free trial subscription that will begin charging you each month if you don't cancel the service.
Your credit score is based on five categories of information: payment history, amount of debt, the age of credit history, types of credit accounts, and recent applications for credit. Improving your credit in each of these areas will boost your credit score.
4. Removing Accurate Negative Information Is Tough
Note the emphasis on accurate. Credit bureaus are only legally obligated to remove inaccurate or unverifiable information from your credit report.
When accurately reported negative information hurts your credit, it's tougher to remove because the credit bureaus are within their rights to report it. In fact, the integrity of the credit system depends on credit bureaus reporting all accurate information, even information that's negative.
There are some strategies to remove accurate negative information—like a collection account for a debt you legitimately owe. These strategies may take more time and effort than a simple credit report dispute. For these types of accounts debt validation (for collection agencies), pay for delete, and goodwill deletion requests are the best options.
5. Doing Nothing Might Be a Strategy
Negative information won't stay on your credit report forever. Most negative information will only stay on your credit report for seven years. There are a few exceptions. Chapter 7 bankruptcy and unpaid tax liens can stay on your credit report for up to 10 years.
If an account is nearing the credit reporting time limit, waiting for it to fall off may be less stressful and time-consuming than trying to remove the account with dispute letters or similar strategies.
Contrary to popular belief, taking action on a negative account does not extend the credit reporting time limit. So, if you pay off a six-year-old debt collection, for example, it will still drop off your credit report after year seven.
Some newer versions of the FICO and VantageScore do not include paid collections in your credit score.
6. Closing Accounts Won't Help
There's a widespread belief that only open accounts are included in a person's credit report, that closing an account will remove it from their credit report. Unfortunately, in some cases, closing an account can actually hurt your credit score.
Closing an account won't remove it from your credit report. All the details about the closed account will continue to be listed on your credit report as reported by your creditors. Moreover, closing a credit card account can, in some cases, reduce person's credit utilization and therefore negatively impact their credit score.
"Before [closing accounts], consumers should take into consideration other factors that comprise credit scores, such as the length of time the account has been opened," says Nancy Bistritz-Balkan, former Director Public Relations and Communications of Global Consumer Solutions at Equifax, in an email interview with The Balance. Equifax is one of the three major credit bureaus. "If you've exhibited the right kinds of behavior for an established period of time with an account (i.e., paying on time every time), then closing that account may not make sense."
If the account is in good standing or can be brought back into good standing by catching up on the past due balance, leaving the account open can actually help you repair your credit. You'll need open, active accounts with a positive payment history to improve your credit score. Opening new accounts with a bad credit score can be difficult, so rehabilitating the accounts you already have open can be much easier.
7. Credit Repair Companies Are Often Untrustworthy
Many credit repair companies make lofty promises they can't fulfill, charge upfront fees, and fail to deliver on their services. All these are prohibited by federal law, but consumers who are unfamiliar with the law wouldn't realize they were being taken advantage of until it's too late.
Over the past several years, the Federal Trade Commission has pursued dozens of credit repair companies who have broken the law. These companies are often required to pay hefty fines and in some cases are banned from doing business in the credit repair industry.
A few signs you're dealing with a shady credit repair company: they ask you pay upfront before any services begin, cite an affiliation with the government or special relationship with the credit bureaus, promise a specific credit score, promise to delete accurate information from your credit report, fail to inform you of your right to dispute information directly with the credit bureaus, or ask you to waive your rights under the Credit Repair Organizations Act.
8. You Can't Expect Overnight Results
It takes time to rebuild a bad credit history. Your credit score considers your most recent credit history more significantly than older items.
A good credit history typically has a minimal number of negative entries and lots of recent positive credit information. A few months of on-time payments is a step in the right direction, but it won't give you excellent credit right away. As time passes and the negative information falls off or gets older, and you replace it with positive information, you'll see your credit gradually improve.
Your credit score may fluctuate during the credit repair process as the information in your credit report changes. Focus on the general trend of your credit score over a period of time rather than the daily fluctuations.
9. To Protect Your Improved Credit, Change Your Habits
Many people go through credit repair—whether doing it themselves or hiring a company—so they can borrow money, for a mortgage or auto loan, for example. There's nothing wrong with this.
But, if you want your good credit to last, you have to adopt habits that will maintain good credit. This means borrowing only what you can realistically afford to pay back (and maybe even a little less). Paying your bills on time is perhaps one of the best things you can do for your credit.
Bistritz-Balkan says, "When it comes to creditworthiness, a great rule of thumb to remember is to pay your bills on time every time. Lenders and creditors want to know that you've been able to satisfy your financial commitments on time every time. Therefore, paying bills on time is an important, fundamental behavior to establish early on."
Repairing bad credit takes time, so it's important to be patient with the process. The amount of time it takes can vary from person to person depending on the information on your credit report and how you're going about credit repair.