Is Credit Repair a Do-It-Yourself Job or Not?

Is Credit Repair a Do-it-Yourself Job?

Depending on the individual, credit repair is a task that people may or may not want to take on alone. While the general idea behind a credit score is simple, the exact way a credit score is repaired can be tricky. Repairing damaged credit cannot happen overnight, but there are steps that can be taken today to work toward a better credit score tomorrow.

What is a credit score?

Simply, a credit score is a numerical value, between 300 and 850, that is assigned to a person as a quick overview of his creditworthiness and risk. These scores are based on people’s personal credit files and are used by credit card companies and financial institutions to decide whether or not to loan money. Obviously, higher scores increase a person’s chance of securing loans, especially larger ones.

When people have low credit scores, banks see them as bigger risks. A credit report is negatively affected when people fail to make promised payments on a credit card, mortgage or any other official line of credit. Determining whether or not to loan money is not the only purpose of the credit score; it is also used to determine interest rates.

According to the University of Illinois, a person with a credit score of 675 could secure a two-year loan for $1,000 with an annual percentage rating (APR) of 6.82 percent. With this arrangement, the person would end up paying $69.71 in interest. If, however, a person with a score of 550 were to take out the same loan, the APR would be 10.69 percent, and he would pay a whopping $111.16 in interest. As is made evident by this small example, higher credit scores could potentially save people thousands on interest payments for larger loans, especially mortgages.

Getting your credit report

Once damaged, a credit score can be difficult to repair. When trying to mend damaged credit, the first step is obtaining copies of the credit report. It is wise to obtain a copy from all three major credit reporting agencies (CRAs). The three major CRAs in the United States are Equifax, Experian and Trans Union, and they are all governed by the Fair Credit Reporting Act (FCRA), which provides consumers with certain rights.

There is often a fee associated with obtaining a credit report, but the FCRA allows people to obtain a free copy if they are:

  • Unemployed and planning to apply for employment within 60 days
  • Receiving public assistance
  • Victims of identity theft whose credit reports have been compromised as a result of fraud

Since September 2005, consumers have also been entitled to one free credit report from each of the nationwide CRAs annually. Regardless of whether or not someone is intending to get a loan, it is still wise to take advantage of these annual freebies. Once people have their credit reports, they can determine what actions need to be taken.

Fixing your credit.

When looking at the credit report, check all credit information for accuracy. Fixing a mistake could cause a big spike in a credit score. Also, some negative items on your credit report could be outdated. Under the FCRA, a CRA is not usually permitted to report negative items older than seven years or bankruptcies older than 10 years. Also, settling any debts, and changing their statuses on the credit report, will help substantially. In a publication of the Maryland Small Business Development Network, Lindy Scarborough gives a thorough overview of credit and 101 tips for legally repairing it.

Enlisting help

Technically speaking, it is perfectly possible to repair your own credit, but is it necessarily the best way to go? After all, it is never a bad idea to ask for help when you are outside of your comfort zone. Reputable debt and credit-relief companies can work wonders for people who have a hard time managing all of the different aspects involved. When legitimate, these businesses help people to shoulder the burden of bad credit and are usually quite reasonable. These companies don’t have to be made up of lawyers or affiliated with the State; they just have to be honest and knowledgeable about credit and consumer rights under the FCRA.

According to a report from the University of Arkansas, a reputable credit-repair company will help teach its customers about money management, help them set up a budget and spend time going over their financial situations. The report also states that credit-repair companies should have counselors who are trained and certified in credit, debt management, money and budget.

If people want to be absolutely certain that a credit counseling service is reputable, they may want to go with a company that is on the U.S. Department of Justice’s list of approved credit counseling agencies. This list can be found on the U.S. Justice Department’s website. It is easy to navigate, allowing users to search by state.

Red flags

As with any business, not every company is trustworthy, and some of them make promises that are impossible, and perhaps even illegal, to keep. Never be fooled by companies that claim to be able to fix credit overnight or erase negative items and bankruptcies forever. Luckily, there are many warning signs that a company might not be on the up-and-up.

Illegitimate companies will make unreasonable demands; they may ask for money in advance, try to keep you in the dark about your rights or recommend that you do not contact a credit bureau directly. Under the Credit Repair Organizations Act, it is illegal for a credit-repair company to misrepresent their services or demand payment before the aforementioned services are rendered.

Some companies may even condone unlawful activity, suggesting that customers craft new credit histories by applying for Employer Identification Numbers (EINs) to be used in lieu of their Social Security Numbers. It is illegal to fabricate a credit history. If someone did so, even under the advice of a disreputable company, he would be subject to prosecution.

An individual can take his credit entirely in his own hands, but he does not have to. If people are feeling overwhelmed by the various odds and ends of their credit, a credit-repair company might be the best solution. There may be some dishonest companies out there, but they are few and far between and fairly easy to spot.