Should You Use a Credit Repair Service?

Many Americans struggle maintaining a good credit score. In fact, 16% of Americans have a low credit score that is between 300 to 579. When you have a low credit score you can run into many more obstacles in life. Luckily, there are ways that you can improve your score! There are plenty of ways to do it but some people choose to get help from a credit repair company. However, are these companies actually worth it?

What is Your Credit Score

Before you can know whether or not a credit repair company would be worth it, it is important to make sure you have a better understanding of your credit score. Your credit score is a number that generally falls between 300 to 850. This number is calculated based on information found on your credit report! Credit bureaus are the ones who do the calculations. There are three major credit bureaus which are Experian, Equifax, and Transunion. These credit bureaus (also known as credit reporting agencies) use scoring models when calculating credit scores. There are two major scoring models which are VantageScore and FICO (but FICO is most common).

Why are Credit Scores Important?

Credit scores are important because they show lenders how you are as a borrower. It is a good measurement of your creditworthiness. Your credit score will impact a variety of factors in life. Important life milestones like buying a home, getting a car, qualifying for loans, and more are all impacted by your credit score. If your credit score is too low you may not even qualify. However, if your score is low but you are still eligible, you will pay more in interest which adds up over time.

What Factors Impact Your Credit Score?

Information on your credit report is used to calculate your credit score. Generally, there are five main categories of information that are important to your score that are found on your report which are:

  • Payment History
  • Credit Usage
  • Age
  • Credit Variety
  • Hard Inquiries

Payment History

This is the most important factor that impacts your credit score and it accounts for 35% of it! Since lenders look at your credit score as a way to better understand how you are as a borrower, your payment history is important. If your credit report shows a history of late payments, collection accounts, etc., then lenders will know that you may not be the best borrower. This means that they take on more risk if they choose to lend to you.

Credit Usage

Credit usage is the second most important factor that impacts your credit score and it accounts for 30% of it. Your credit usage (also referred to as your credit utilization ratio) looks at your total available credit compared to the amount that you are using. For example, if you have a credit card with a limit of $1,200 and you used $600 so far then your credit utilization ratio would be 50%. A good rule of thumb is to keep your credit usage below 30%!

Age

Age doesn’t mean your age, but instead it means the age of your credit. The age of your credit plays an important part to your credit score and accounts for 15% of it. Typically a longer (healthy) credit history means a better credit score. Factors like the age of your newest account, the age of your oldest account, the average age of your accounts, etc., will be considered!

Credit Variety

Tied for last place in factors that impact your credit is your credit variety. Your credit variety accounts for 10% of your credit score and just means how many different types of credit you have. There are two main types of credit which are installment loans and revolving credit. If you have a variety of credit types on your credit report then your score may be better overall. A credit card (revolving credit) and an auto loan (installment loan) would be two types of credit that can add to your diversity.

Hard Inquiries

Tied with credit variety are hard inquiries which account for 10% of your credit score. There are two different types of inquiries which are soft inquiries or hard inquiries. Soft inquiries do not have any impact on your credit. They are generally used for pre-qualifying individuals since they are not as in-depth as a hard inquiry.

Hard inquiries are a different story. These inquiries require written consent from the creditholder in order for lenders to pull this type of inquiry. Generally hard inquiries are done when a lender is trying to verify your credit score.

Understanding Different Credit Scores

Most of the time credit scores fall between 300 to 850. However, within that range are even more ranges that determine your credit standing. The scoring model varies but generally scores that are:

  • 300-579 are Poor
  • 580-669 are Fair
  • 670-739 are Good
  • 740-799 are Very good
  • 800+ are Excellent

What are Credit Repair Companies?

People that have poor to fair scores should especially focus on building their credit. Credit repair can be done in a variety of ways. However, some people choose to get help from a credit repair company. Credit repair companies are organizations that help consumers better understand their credit and aim to repair it. They work on repairing credit by reviewing your credit report and disputing inaccuracies with credit bureaus. They advertise that their knowledge and experience in this field gives them an edge when dealing with credit issues, especially the ones that may be harder to resolve by yourself.

How Do Credit Repair Companies Work?

Generally credit repair companies will request to review your credit report from all three of the major credit bureaus. When reviewing your credit report they will look for common errors like:

  • Inaccurate Accounts
  • Incorrect Hard Inquiries
  • Duplicate Accounts

If your credit report has a lot of negative marks then it can have a hefty toll on your credit score. Once these companies are done reviewing your credit report they will dispute anything they can.

When anyone sends a dispute (regardless of whether it is a credit repair company or yourself) the credit bureau will need to review the accuracy of the negative mark in question. If credit bureaus are unable to verify the disputed item then they will need to correct it or remove it completely. If removed the negative item will be taken off and so will the negative impact to your credit score.

How Much Do Credit Repair Companies Cost?

There is no set dollar amount for how much credit repair companies cost. The cost will vary depending on the company and service you choose to get. Generally companies will have a subscription-based payment, a pay-by-item removed structure, or even a one-time flat rate. Regardless of the payment structure, it is important to remember that the Credit Repair Organizations Act makes it illegal for credit repair companies to request or receive payment until the promised services are delivered.

Overall

Information found on your credit report will have an impact on your credit score. Credit repair companies can review your credit report and dispute any errors, inaccuracies, or unverifiable information. However, these services do not come free! Credit repair companies cost money and they don’t do anything that a consumer cannot do themselves. Some people feel credit repair companies are worth it since they can save people time compared to doing it themselves. However, if you can do it for free then you may want to hold off on paying for it. Plus there isn’t a guarantee that items will be removed. They need to be unverifiable! It’s up for you to decide if you should get help from a credit repair company. However, if you need help you may benefit from getting in touch with a credit counseling agency. These are nonprofit organizations that can help people better understand their credit situation and provide advice through trained professionals.