Debt Consolidation

What is Credit Repair?

Posted on: March 24, 2010
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Credit repair is, essentially, fixing a “broken” credit rating. A credit rating or credit score is a profile that provides a measurement based on such factors as consistently meeting payments, repayments of outstanding debt, credit history length, types of lenders providing credit and more.

A few years ago, credit scores didn't seem to matter that much. Those with poor credit ratings had a relatively easy time borrowing money, even for major purchases like a home. Then the credit bubble burst and those days were over.

Now, lenders are much stricter about whom they will lend to. Yet we're in a time when the number of people with with damaged credit ratings has never been higher. This mismatch between lending criteria and borrower suitability gave rise to a new emphasis on credit repair.

How Credit Repair Works

There are two approaches that work best for credit repair and they are available to everyone. The first is to build up a track record of making on-time monthly payments. The second is to challenge any incorrect information on a credit report and get it removed.

Individuals can do this for themselves or hire a reputable credit repair agency to help them.

Make Monthly Payments

A history of consistently paying on time is critical to strengthening a credit rating. In fact, missing even one loan payment can drop a credit score by as much as 100 points.

Ironically, those in good financial shape and in a position to pay off their existing debt may be damaging their credit scores by doing so, It's a mistake to believe that paying off a debt, such as paying off a credit card balance in full every month, builds up a credit rating. It doesn't. It can even do the opposite – damage a credit rating.

How can this be? To understand why, flip the situation around and look at it from a lender's perspective.

Lenders make money by charging interest on the remaining balances of those who pay down debt on a monthly basis. They do not make money from those who pay off their balances. In the lender's eyes, full payoffs do not allow them to make a profit; which is the reason they agree to lend.

Fix Credit Report Errors

There are three credit reporting agencies and making sure that the report from each is correct is a critical aspect of maintaining a good credit standing. Don't be surprised if you have a different credit rating with each agency. The reason is that they each have their own way of calculating your credit score from essentially the same information about you.

Fixing credit report problems is accomplished by sending a personal letter disputing any individual piece of incorrect information. It's important to keep an eye on credit reports from all three of the agencies, so problems can be spotted and fixed quickly. This process is key to maintaining a good credit rating.

The three credit rating agencies: Equifax©, Experian, TransUnion©

Credit Repair Companies

There are reputable agencies that can help an individual build up or keep a good credit rating by making sure payments are made on time and making sure credit reporting information is accurate and getting inaccurate information removed.

These companies offer the advantages of maintaining discipline in payments. They also have familiarity with exact language that works in getting reporting agencies to remove incorrect information, and so they can be more effective letter writers than individuals writing on their own behalf.

Watching Out For Scams

Less scrupulous companies credit repair companies do exist and they can end up harming a client's credit rating and stealing money. Some agencies require payment upfront from clients, which is illegal. Frequently, they claim they can get negative information removed from a report, even if this information is accurate, or establish a new credit identity for a client – both of which are also illegal. Employing dishonest or illegal tactics in trying to repair a credit rating is never a good idea.

Getting Guidance

The U.S. Federal Trade Commission has very useful information for consumers in understanding how to go about credit repair, your rights and spotting dishonest companies.