How Do Credit Repair Companies Get Paid?

The recession of 2008-2010 left a wide path of financial destruction for a lot of people. Many turned to credit repair companies to help get themselves back on track and increase their credit score. Qualifying for a credit card or renting an apartment may pose challenges if you have a poor credit score. Most people feel intimidated when it comes to repairing bad credit and hire a credit repair company or credit counseling service to help.

As nice as it sounds to have a company looking to save consumers money, keep in mind this isn't charity. With the exception of some nonprofit credit counselors, most of the credit repair industry is less about helping others than it is about making money. That money, it turns out, is coming from the very consumers using their credit repair services. How much are people paying to have someone else help them clean up their credit files?

What do credit repair companies do?

Credit repair companies are businesses that help people enhance their credit histories. They focus on finding and fixing negative credit information, like late payments, on credit reports to raise a person's credit rating. Unlike credit counseling, which helps with debt management, credit repair aims to improve credit reports. 

Some credit repair companies may use telemarketing to reach out to consumers, but it's essential to be cautious about scams. These services also differ from debt management, which is about planning to repay existing debts. Understanding credit problems, credit limits, and implementing ways to improve your credit score are key aspects of what credit repair companies do.

How much do credit repair companies charge?

Credit repair service fees can seem all over the place. Part of the reason for this is that there are a few different ways the companies operate. The most common structures are:

• Subscription-based
• Flat fee
• Pay-per-deletion
• Guided do-it-yourself

Subscription-based

The majority of online credit repair services are subscription-based, with fees for reputable companies falling into the range of about $50 to $100 per month. While a common promise in the industry is to have your credit fixed in as little as six months, the average length of time users have a subscription with a credit repair company is tougher to gauge.

Flat Fee

The flat fee system is where a credit counselor assesses your situation up front and sets a fixed price to complete all the work for you. Since these companies get paid the same whether it takes five months or 15 months, you won't face recurring bills.

Pay-Per-Deletion

A newer alternative to subscription services and flat fees is the pay-per-deletion model. This model operates just as it sounds. Instead of paying monthly fees, pay-per-deletion only charges you when the credit repair company removes the negative inaccurate information from your credit report. There is often some kind of setup fee that's $100 or more. Getting each item removed may only cost about $25 for standard credit dings or up to a couple hundred for bankruptcies, judgments, or tax liens.

Do-It-Yourself Programs

Guided, do-it-yourself programs are a newer alternative. A flat fee of $200 to $400 gets you access to online training courses that teach you about repairing your credit on your own. Of course, this system requires a lot more effort on your part. The results will only be as good as you make them.

What do credit repair companies actually do for these fees?

Credit repair companies probably aren't doing anything you couldn't do on your own. In fact, an easy first step to repairing credit on your own is finding out your credit score. You can get a free copy of your credit report at annualcreditreport.com. Once you know your credit score, you can decide whether it's worth hiring a credit repair company or not. The exact tactics that credit repair companies use are often industry secrets. Basic services usually include:

• Fixing mistakes on your credit report
• Sending good faith letters to lenders to establish your credibility in the repayment process
• Assessing your credit report for overlooked opportunities to improve your score, such as making sure the credit bureaus can verify all of the negative information

The more established credit repair companies may also have good relationships with lenders. This allows them to negotiate reduced and more flexible repayments, but not all lenders are willing to accommodate such changes and many don't like working with credit repair companies. 

Some of the more expensive services might include access to dedicated paralegals or other credit specialists who can write dispute letters and offer more personalized care. Most online companies also have premium services available, such as fraud monitoring and identity theft protection, for additional fees.

Do you need to watch out for scammers?

When considering online credit repair services, it's important to be aware of the varying upfront fees. Some companies may advertise low rates but fail to deliver genuine value. A common credit repair scam involves filing disputes for all delinquent accounts with credit reporting agencies. Federal law, such as the Fair Credit Reporting Act, mandates that these agencies remove the contested accounts during the investigation. 

This leads to a temporary improvement in the customer's credit score. However, once the accounts are validated again, the consumer's credit score plummets back to its previous state.

It's crucial to watch for red flags, including promises of instant and guaranteed credit score improvements, upfront fee demands, or unnecessary requests for your social security number. Legitimate credit repair companies adhere to consumer protection laws, such as the Credit Repair Organizations Act, which protects consumers from deceptive and unfair practices within the credit repair industry.

Beware of companies suggesting a new credit identity, as this could signal fraudulent activities. If an offer appears too good to be true, there's a strong chance that it is. Stay informed to protect yourself from potential scams. Consult reputable sources, such as the Federal Trade Commission, for guidance on trustworthy credit repair practices.

The Bottom Line

Unless your situation is complicated or urgent, you might find that repairing your credit and building a positive credit history on your own is easier than you might think. If, however, you feel like it's too much to deal with by yourself, a credit repair company can help.

Be sure to fully research a company, including news articles, consumer complaints, and the Better Business Bureau, before committing hundreds of dollars to their services. It's not cheap, but a good credit repair company might be able to help if you find yourself running into brick walls with the credit reporting bureaus. If you have additional questions or would like to know more about your legal rights, you should consult with a credit repair attorney.