How Credit Repair Affects Your Credit

How does credit repair affect your credit? One would think the answer should be fairly obvious — the entire point of credit repair is to improve credit. But it might not always work out that way. In fact, there are times when working with companies that advertise credit repair that you could be advised to do things that will end up hurting your credit before it helps it.

That’s why it’s so important to understand what credit repair really is and how to ensure that it helps you. Here are some important things to know about how credit repair affects your credit.

The confusion around credit repair

For starters, there are many companies that advertise credit repair when they, in fact, offer services to attempt to settle your debt. These services might be able to help you close the loop on a debt you weren’t able to repay, but that act can also hurt your credit. Lenders don’t want to see too many settlements on a credit report; they want to see money borrowed and repaid. (This could be why payment history ranks so highly in credit scoring calculations.)

What’s more, the way these companies might try to negotiate a settlement can do immediate and sometimes long-lasting damage to your credit. That’s because some companies will tell you to pay them instead of your creditors each month, putting your payments into an escrow account. This serves as a way to save money for an eventual settlement, and it theoretically gives them negotiating power — operating on the assumption that a fully defaulted account is easier to settle on than an account that’s current on payments.

Leaving the ethics and efficacy of these tactics for another conversation, let’s make it clear right away that this is not credit repair. Credit repair is any action taken to improve your credit — and you don’t need a company to help you do it. In fact, you can start working on credit repair on your own at any time.

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What is credit repair, then?

As mentioned above, any action you take to improve your credit can be called credit repair. Find and dispute an error on one of your credit reports? You’re working on credit repair. Learn ways to get better credit scores, including old habits to break? You’re working on credit repair. So many of these things are in your power to do — and if you understand how credit works, then you can make sure your credit repair efforts actually help your credit.

Here are a few things you can do right away to start working on repairing your credit:

  • Make all payments on all accounts in full and on time every month — this is the highest-ranking factor in credit scoring for FICO® credit scores

  • Review your credit reports from all three credit reporting companies and dispute errors if you find any

  • Reduce revolving debt (such as credit card debt) as much as you can, as high balances on revolving debt can negatively affect your credit scores

  • Try to handle any accounts in debt collections, something you can do on your own by calling the debt collections company and negotiating a settlement or repayment plan that you can afford

  • Keep old credit accounts open to maintain a long history and only apply for new credit when you need it (although you shouldn’t be afraid to shop around for the best interest rates when you do)

You don’t need a professional or a company to help you with any of these actions, and all of these actions can help you repair your credit. If someone tells you to do something for your credit that isn’t good for your finances — such as taking out a loan you don’t need — remember that credit isn’t that complicated. Things that are good for your credit should also be good for your finances, and any tips that say otherwise might be suspect.

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How credit repair affects your credit in a positive way

Having bad credit can be demoralizing, to say the least, but it doesn’t have to be the end of the road for you. Even if it took years to end up with a credit profile you’re not happy with, you could see improvements in as little as a few months if you diligently follow the right steps.

It might seem easier if you pay someone else to help you, but that’s not necessary. Anyone can do the aforementioned things and start repairing their own credit if they so choose. 

However, getting professional help with your debt (such as with a nonprofit financial counselor or a bankruptcy attorney) is a different story. But if you want to make sure credit repair affects your credit in a positive way, don’t fall for tactics that seem suspect or guarantee fast success. Credit repair doesn’t have to take years, but it certainly doesn’t happen overnight.

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