Are Credit Repair Companies Worth Hiring?

Bad credit can be a real downer. When you’ve got a low credit score, getting approved for a loan, line of credit or credit card can seem impossible. If you do get approved, odds are you’re going to be paying a decent chunk of interest on whatever you borrow.

If you’ve got bad credit because of a past financial snafu, getting it back on track should be a priority. One way you may be tempted to do that is by hiring a credit repair company. These companies charge a fee and in return, they’re supposed to help you improve your credit score.

The question is, should you pay for credit repair? Or, is it possible to undo the damage to your credit on your own? If you’re stuck in the bad credit category and you’re looking for a way out, keep reading to learn whether credit repair services are worth the cost.

What Is Credit Repair?

Credit repair is just that–it involves doing things to help your credit when late payments collection accounts, delinquencies, bankruptcies or foreclosures are dragging your score down. When you sign on with a credit repair company, they act on your behalf to attempt to get negative information removed from your credit report.

The credit repair company pulls your credit reports from the three major credit bureaus: Equifax, Experian and TransUnion. Then, they review your reports to see if there’s any information that can be disputed that might be hurting your score. For example, if one of your creditors isn’t reporting your balance or payments properly, that could knock points off your score.

If the credit repair company finds something they can dispute, they send a letter to the credit bureau that’s reporting the information. Essentially, the letter says that they’re disputing the information on your behalf and it explains the reasons behind the dispute.

At this point, the credit bureau is legally obligated to investigate the dispute claim within 30 days. If it’s determined that the dispute is valid, any inaccurate information has to be corrected or removed from your credit file. If the dispute is deemed invalid, then the credit bureau has to issue a letter explaining why the information is assumed to be correct.

Are Credit Repair Companies Legit?

The short answer is yes. The credit repair industry is regulated by federal and state laws. Credit repair companies operate on a for-profit basis and they market their services directly to consumers. They’re not to be confused with non-profit credit counseling organizations, which typically don’t charge a fee for their services.

Credit repair by itself isn’t illegal and credit repair companies are required to follow certain rules established by the Credit Repair Organizations Act (CROA). The Act specifies that credit repair companies aren’t allowed to do any of the following:

1. Guarantee that they can remove specific items from your credit report
2. Charge you an upfront fee before providing services
3. Fail to give you written notice that you have the right to dispute inaccurate data on your own, at no cost
4. Fail to allow you to cancel your agreement at any time, for any reason

Those guidelines are designed to protect consumers but that doesn’t mean that every credit repair company avoids these practices. The Federal Trade Commission (FTC) routinely takes action to shut down fraudulent credit repair scams whose sole purpose is to fleece unsuspecting consumers out of their money. These companies operate under the guise of doing good but in many instances, they can actually cause even more damage to your credit.

Should You Pay for Credit Repair?

Credit repair companies are in business to make money and the way they do that is by charging you a fee for their services. Under the Fair Credit Reporting Act (FCRA), you have the right dispute information on your credit report for free. What you have to decide is whether you’re more comfortable paying the fee and relying on the credit repair company to do the work, or disputing the information on your own.

There are pros and cons to both sides. Paying a credit repair company takes the pressure off you to interact with the credit bureaus. You simply pay the fee and they take care of the heavy lifting. If you’re not really familiar with how to read your credit report or you’re simply pressed for time, hiring a credit repair company may be the better option if you’re looking for a low-stress route.

On the other hand, you have to think about the cost and how much value you’re really getting. Let’s say a credit repair company is charging you $100 a month to dispute 10 separate items on your credit report. At the end of the day, they’re able to get 5 of those items corrected or removed, adding approximately 30 points to your credit score.

If your credit score was really in the dumps before, those 30 points can make a huge difference on your credit prospects going forward. For example, moving from a FICO score of 590 up to a 620 could put you in range to qualify for a mortgage. If you’re hoping to buy a home, that $100 you’re paying a month could be worth it if credit repair helps you to qualify for a loan.

Now, let’s say the credit repair company is only able to get 2 items removed or corrected, resulting in a smaller credit score increase of just 10 points. Having a 600 credit score versus a 590 might help you qualify for a slightly better credit card but it’s not going to do you much good in terms of getting a car loan or a mortgage, at least not at favorable interest rates. In that scenario, you may come ahead by just keeping the $100 and disputing negative items on your credit report yourself.

Do Your Research Before Committing to a Credit Repair Company

If you’re thinking of hiring a credit repair company, don’t rush into a decision. Take time to compare the fees different companies charge, as well as their reputation. The goal should be to find a credit repair company that’s reputable and can provide results, while also being reasonable where the fees are concerned.