Personal Credit Reports and Scores

The truth about credit repair

Be debt-free in 30 days!! Improve your credit score 200 points!! Wipe away negative records today!! Credit repair and debt consolidation companies like to make promises about delivering instant credit improvement. But the truth about these agencies and their impact on your credit can be shocking.

The usual suspects
Credit repair agencies break down in to three basic categories:

Credit counseling agencies - The credit counseling industry is a $7 billion a year industry, pretty profitable for a group of non-profit agencies. While some of these agencies can be helpful, many are expensive, ineffective and damaging to your credit. Most credit counseling agencies will negotiate settlements with your creditors and help you create a monthly budget for a fee.

Credit repair companies - Credit repair is credit counseling's evil twin. Companies that offer credit repair services often use illegal and unauthorized tactics to try to clear your report of accurate records. Promising to erase bad records and clear your debts, they usually just take your money. The FTC has a warning page about these companies here.

Debt consolidation agencies - Debt consolidation agencies are similar to credit counselors in that they will work to negotiate settlements with your creditors. Debt consolidation agencies take it one step further and offer consolidation loans along with other services. Most debt consolidation agencies require you to have more than $7,000 or $10,000 in debt to participate.

The dangers
Each agency has their own procedures and terms, but there are a few things you need to look out for when dealing with a credit repair agency.

Fees - From set-up fees to percentage charges, reducing your debts can be surprisingly expensive. Even the non-profit agencies can sometimes charge hefty fees. This money takes away from the amount you can pay toward reducing your debts, so be sure you know exactly what you will be charged.

Late payments - It is fairly common for credit agencies to skip your first rounds of payments and pocket the money instead. This causes a record of late payments on your credit report that can damage your credit score for 7 years. If you are working with an agency, check your credit report to ensure that your payments are being made on time.

Credit records - When an agency negotiates a settlement with a creditor, your account could be marked as being involved in credit counseling. While most creditors and credit scoring formulas no longer consider this as a negative, there are some creditors that will not lend to consumers in credit counseling.

Consolidation - Some debt consolidators just negotiate with your creditors, but others actually consolidate everything into one loan. If this is a home equity loan, you could risk losing your home if you are unable to pay the loan. Some consolidators may also advise you to move your debts onto one account, but if your balances exceed 35% of the credit account's limit, your score could drop.

Disputing - Some agencies, especially credit repair, will submit dispute letters to the credit reporting agencies for accurate account records. While the chances of removing an accurate negative record from your report are slim, you run the risk of also removing positive account information from your report and lowering your credit score even further.

What to do
Everything that an agency can do, you have the power to do on your own. You can reduce your debts, negotiate settlements and improve your credit score from the comfort of your own home. Plus, with do-it-yourself credit improvement, all your money goes directly to the debts and you can avoid the practices that damage your credit. You can get started with this process in the "improvement" section of TrueCredit's Learning Center. If you choose to sign up with an agency, select one with low fees that has a good reputation and that clearly explains their procedures.