How do credit repair companies work?

You are not alone if you have bad credit and are having trouble qualifying for credit cards, car loans, personal loans, or even being turned down trying to rent an apartment. For a price, credit repair companies can help you improve your credit score but you have to decide if this is the right option for you.

Vice president of communications at National Foundation for Credit Counseling believes you should weigh your options. Consider the benefits of paying a credit repair company to take care of it for you versus attempting to repair your credit on your own.

Credit repair companies will review your credit reports and address your negative items with the credit bureaus. Here is how these companies operate and if you choose to hire one, it's advisable you seek credit counseling beforehand.

These companies provide a service to improve your credit for a set price. They will do all the hard work including working with the credit bureaus.

Keep in mind, credit repair companies are not the same as credit counseling agencies. Credit counseling agencies are usually free and are classifeid as nonprofit financial institutions. They will review your finances, debts, and credit reports in order to educate you on how to get your credit under control and manage your expenses.

Some credit repair companies are scams, so it's really important that you research these companies before deciding to work with them.

There are several steps you can take to verify these companies. First off, read their reviews on the Better Business Bureau's website. Then look into the Consumer Financial Protection Bureau's database for complaints. Finally, research other review sites for user reviews which are usually pretty accurate.

Always remember, if a company sounds too good to be true - then chances are, there is something not right. If a credit repair company claims they can take care of anything, there might be quite a few red flags that lean toward scams.

Here are some claims by these credit repair companies that you should be aware of:

Once again, you should look for a credit counselor before proceeding down this road. A credit counselor can give you a pretty good idea of what's on your credit report and how you can improve it over time.

If you choose a credit repair company, they will ask for a copy of your credit report from the three leading bureaus which are TransUnion, Experian, and Equifax.

They will review your credit report for any negative issues including:

Next, they will create a plan to dispute errors and will negotiate with creditors to remove these issues. Their plan might include:

They may even suggest that you apply for a new credit card to introduct positive tradlines to your credit report. That said, if you have serious problems managing your money and credit, then a new account might not be the best thing for you. It's not a great idea to add even more debt if you don't need the money or line of credit.

The fee for hiring a credit repair company can vary depending on the company, so you might want to research a few before deciding on one particular company. With that said, there are certain laws that reputable credit repair companies must follow. For example, they cannot request payment until they have provided you with their promised work. They might require a one-time fee, or require you to pay for each negative item that they remove from your report. Usually, this can start with $35 for each deletion and could cost up to $750 or more.

In some cases, they will charge you by the month which can range from $50 to $130 or even more. They might also need a setup fee or fees for accessing your credit reports. You will have to decide how much it's worth it to you to clean up your credit report. You might actually be better off simply making payments toward paying down your debt and disputing errors on your credit report on your own.

Credit bureaus are normally given 30 days to investigate your dispute after receiving your request. Under normal circumstances, the credit bureaus will contact the company that provided the information and request an investigation. Afterward, the credit bureau is required to send you the results from the investigation within 5 days after it is completed.

If the credit bureau decides the dispute is frivolous, they can decide not to investigate. Again, they are given 5 days to communicate their reasons for not proceeding with the investigation.

Always exercise extreme caution when working with credit repair companies. In 2016, more than half the complaints against credit repair involved alleged fraud or scams.

If you find a company you believe is reputable, ask to speak with someone on the phone and discuss whether their services are a good fit for your unique situation. Ask them how much they charge, and compare their fees to other comparable credit repair companies. Ask them specifically what services they will provide, and what guarantees (if any) they offer. Last but not least, consider the money you will save if you dispute items on your credit report on your own, and determine whether it is worth it to pay a credit repair company.

The Credit Repair Organizations Act (CROA) has made it illegal for credit repair companies to make false claims about their services and results. If you believe you have become a victim of a credit repair scam or you have other issues with the company, you can submit a complaint with the Consumer Financial Protection Bureau.

Keep in mind, credit repair companies have numerous requirement under CROA including:

If a credit repair company requests payment up front, won't put their promises in writing, or will not answer your questions, this is a sign that you should run away!

If you feel overwhelmed or unable to clean up your credit on your own, just be aware of the warning signs and avoid companies that appear to be a potential scam. If their claims are too good to be true, then exercise caution. Lastly, you should meet with a credit counselor before signing a contract with a credit repair company.