Credit Repair Companies:
Should You Pay to Improve Your Credit?

Having a good credit rating is important. Without it, you may be denied low interest loans and lines of credit, a job, a rental, and even an insurance policy. If your credit report shows a history of debt problems or contains errors, you may be considering using a repair service to “clean it up.” Before you pay, however, know the way these businesses operate. In the vast majority of cases, hiring an outside company will do no more than waste your money.

How credit repair businesses work
The most common way credit repair businesses work is to dispute all negative items that appear on your report, whether they are accurate or not. Because the credit bureau has 30 days to investigate, this random dispute method can temporarily produce positive results. During the inquiry, the items in question won’t be included in a credit score, and a notice will appear under each disputed item. If the creditor doesn’t respond with proof that the item is accurate, the credit bureau will remove it.

Sound good? Well, there are a couple of problems with this process. The first is that if the information the credit repair service is disputing is indeed correct, they will re-report it the next time they submit data to the bureaus. Also, deliberately disputing accurate notations is an illegal misuse of the process. Lastly, if an item genuinely should not be on the report, the Fair Credit Reporting Act guarantees you the right dispute the information with the bureaus easily and for free.

Another practice these types of businesses may use is file segregation. This is where the credit repair service has you apply for an Internal Revenue Service Employer Identification Number (EIN), which has the same number of digits as a Social Security number. Once you have the EIN, you are then instructed to apply for new credit with it, so you can build an entirely new credit history. This practice is not only against the law, it is rarely effective. By starting all over again you will have a blank credit history, which lenders often perceive as negative or suspicious.

Alternatives to credit repair services
You can repair your own credit in a number of ways. If the information on the report is inaccurate, simply contact the bureau on your own and dispute the item. For negative but accurate information, you have a couple of options:

• If the debt is nearing the time it will be removed, you may choose to let it drop off naturally. Most negative information won’t be evident after seven years from the date of last activity. Chapter 7 bankruptcy will show for ten years, and defaulted student loans and child support arrearage may remain until satisfied.

• If you have accounts in collections, you can either pay them in full or offer a settlement. Settled accounts don’t look as good on a report as those that are fully satisfied, so weigh the money you save against the effect on your credit report.

• Start using credit responsibly. The sooner you begin to borrow and repay money, the faster you can heal past problems. A secured credit card is a great way to reestablish credit. With it, you put down a cash collateral deposit (often a few hundred dollars) at your financial institution. That sum equals the credit line for that account. Use this card to pay for expenses that are within your budget. By always paying on time and never carrying a balance, you will create a positive credit history.

Building and maintaining a good credit rating keeps your opportunities open. However tempting it may be to pay someone to undo damage, you are your own best resource. In short, no one can legally remove accurate and timely negative information from a credit report, and everything a credit repair clinic can do for you legally, you can do for yourself at little or no cost.