Bad credit can not only result in higher-interest loans, but it can lead to higher auto insurance premiums, since insurance providers factor credit scores into their rates. While many credit repair companies tout their ability -- at a cost -- to "repair" your credit, you should avoid some of these outfits, experts say.
“The purpose of a credit score is to accurately reflect a person’s financial past,” says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. So if you’ve amassed a few late payments or had an account go into delinquency, she says, no company can drastically improve your credit score right away.
But if there are mistakes on your credit report, such as a balance that you’ve already paid off or a debt that doesn't belong to you, the correction of those mistakes can raise your score and save you money on loans and auto insurance. Helping consumers achieve that is what reputable credit repair services do, says Jim Kemish, president of Sky Blue Credit Repair in Delray Beach, Fla.
“People come to us if they don’t have the time or energy to do it on their own, or because when they look at their credit report, they can’t understand it,” Kemish says.
After an initial consultation, credit repair companies typically charge a moderate setup fee, along with a monthly fee for handling disputes with credit bureaus and offering advice on how clients can improve their credit over time.
Separating fact from fiction
Muddying the waters are scammers who claim they can miraculously improve your credit by making your past financial mistakes disappear -- an action that's illegal. Companies that will falsify any of your credit information are not only breaking the law, but they could be putting you in hot water as well. According to the Federal Trade Commission, you could face prosecution if you use the mail or telephone to apply for credit and give false information.
While the scammers give legitimate credit repair companies a bad name, some experts say credit repair companies don’t do anything that consumers couldn’t do for themselves. You can get a copy of your credit report and review it to make sure it’s accurate, says Terry Clemans, executive director of the National Credit Reporting Association. If it’s not, “follow up directly with the credit reporting agency, write the letter very clearly, keep copies and follow up diligently,” Clemans says.
Although it may take time, you can take the money you would have paid the credit repair service “and apply it to paying down a credit card or paying off any past due debts,” Clemans says.
Cunningham points out that a less expensive way to have a professional look over a credit report is to go to a nonprofit credit counseling agency. Many of those agencies will undertake that task for free.
Red flags to watch
If you'd prefer that a credit repair service do the job, check out the company with your local consumer protection agency or the Better Business Bureau. Also, be on the lookout for a few red flags that can indicate you should steer clear of the company:
• It claims it will make your debt go away. “Credit repair is not about getting rid of legitimate derogatory information,” Kemish says. “It’s about understanding the credit report and correcting or removing erroneous accounts and information from the report.” If a company says it can make your car repossession disappear, walk away.
• It charges an upfront fee. It's illegal for a credit repair company to require a payment before services have been completed, as part of the Credit Repair Organizations Act, passed in 1996. Legitimate companies “will charge you after the work has been performed – typically a week or so into the process after they’ve done the setup and consultation,” Kemish says. By law, they also must let you know your credit-related rights by giving you a copy of something known as the "Consumer Credit File Rights Under State and Federal Law."
• It promises the sun, the moon and the stars. “Look out for those guarantees that a certain thing will happen,” Cunningham says, “such as that the company will raise your credit score by 100 points.” No credit repair service can guarantee when, or by how much, certain actions will affect your credit score.
• It promotes a change in identity. Some companies may suggest that you create a new credit identity by applying for and using an IRS-issued "Employer Identification Number." Cunningham says: “If anyone suggests that you create a new identity or a new identification number other than your Social Security number, hang up."
The bottom line: Rebuilding credit takes time, and any company that offers you a quick fix toward a higher credit score should be treated with a healthy dose of skepticism. “If it seems too good to be true, it probably is,” Cunningham says.