Credit repair: What it is and how it works

Having good credit can help in lots of ways, from increasing the chance of being approved for a mortgage to possibly getting a better rate on car insurance. But for people with poor or less-than-perfect credit, better credit can seem out of reach. 

Here’s good news: Repairing credit takes time, but it can be done.

Key takeaways

• To repair credit, it’s important to consistently practice responsible credit habits.

• Using credit responsibly means doing things like paying statements on time every month.

• The better a person’s credit is, the more attractive they may be to potential lenders.

• Reputable credit counselors might be able to create a plan for improving credit, but there are also potential credit repair scammers who claim they can provide quick fixes for fees.

Credit repair is the process a person goes through to improve their credit. Repairing credit and improving credit scores is important because credit scores reflect a person’s creditworthiness—something lenders look at when deciding whether to offer loans. 

Credit scores can also affect the credit limits and interest rates a person is offered on loans and credit cards. Credit history might also be a factor when:

• Landlords review rental applications

• Insurers determine premiums

• Utilities or cellphone companies decide whether security deposits are required for service

Ultimately, the healthier a borrower’s credit reports and scores are, the more attractive the borrower may be to lenders.

Credit repair can take different forms. For example, it can be based on big actions like adopting responsible credit behaviors such as making on-time payments and limiting applications for new credit. 

It can also involve smaller actions like identifying inaccurate information or other negative items on your credit reports, like late payments and charge-offs. If derogatory marks on your credit report are accurate, they generally won’t fall off for about 7-10 years. But if you think there may be mistakes on your report, you can always dispute them.

By demonstrating to creditors that you’re a responsible borrower and responsibly using your credit, you could improve your credit over time.

Credit repair can take time. There aren’t any shortcuts. And the timeline for repairing credit can depend on a person’s financial situation and current credit rating. For example, it may take longer to improve a poor credit score than to repair a fair credit score. 

A person’s credit history comes from their credit activities, both positive and negative. But the good news is that the effects of negative information may lessen over time.

If you have fair or bad credit, here are steps you can take to start improving it:

When it comes to maintaining or improving your credit scores, your payment history is an important credit-scoring factor. So catching up on missed and late payments can be an important step. Setting up calendar reminders or automatic payments is one way to make sure you don’t miss payment dates.

Credit-scoring models pay close attention to your credit utilization ratio, which is the amount of credit you’re using versus the total credit you have available. They also consider how much unpaid debt you have across all your accounts. Typically, the lower your credit utilization, the better your scores. That’s because a low credit utilization ratio could be a sign that you’re using your credit responsibly.

According to the Consumer Financial Protection Bureau (CFPB), “Experts advise keeping your use of credit at no more than 30 percent of your total credit limit.”

Paying your credit card balances in full every billing cycle can help you pay less in credit card interest than if you carry over your balance month after month. And it can ensure that you stay below your credit limits and avoid adding to credit card debt.

Try to apply for credit only when you truly need it. According to the CFPB, “If you apply for a lot of credit over a short period of time, it may appear to lenders that your economic circumstances have changed negatively.”

You might not be able to qualify for a traditional credit card if you’re rebuilding your credit. But a secured credit card could be an option. “With most of these cards, your credit line starts out small,” the CFPB explains. “As you show you can pay on time, your credit limit may grow and you may have your deposit refunded.” 

You can compare secured credit cards like the Quicksilver Secured Rewards or Platinum Secured cards to see if one might fit your needs.

Becoming an authorized user on the credit card account of a family member or friend gives you access to their line of credit. And if their credit card issuer reports the activity of authorized users to the credit bureaus, the primary account holder’s good credit and responsible use of their card could help you build your credit. But remember, negative actions could hurt the credit of both users.

If you check your credit reports and find errors, you have a legal right to dispute them. Under the Fair Credit Reporting Act (FRCA), you can send a dispute letter to the three major credit bureaus about errors in their report(s). You should provide account numbers and other details about the errors you’re trying to have corrected.

Credit monitoring can be a simple but important part of credit repair. Doing so can help you track your progress. It can also help you spot errors or unauthorized activity that may be hurting your credit.

One way to stay on top of your credit is with CreditWise from Capital One. With CreditWise, you can access your TransUnion® credit report and VantageScore® 3.0 credit score as often as you like without hurting your score. The best part is you don’t need to be a Capital One cardholder to use CreditWise. It’s free for everyone. Plus, the built-in CreditWise Simulator can help you see the possible effects of several financial choices, like paying off a credit card or taking out a personal loan.

You can also get free copies of your credit reports from the three major credit bureaus by visiting AnnualCreditReport.com.

If you’re working to rebuild your credit, you may find legitimate companies that exist to help. They can offer credit counseling or help you dispute errors on your credit reports. But not all credit repair companies are reputable. 

Here are some things you should know before considering credit repair services:

According to the Federal Trade Commission (FTC), some credit repair companies target people dealing with significant debt. The companies promise to help them lower their repayment obligations without actually intending to do so.

It may be a warning sign if a credit repair company does the following:

• Asks for payment upfront for services, which is prohibited by law

• Requires a written contract to work with them

• Promises to remove negative information from your credit reports, even if the information is accurate and current

• Refuses to explain your rights and actions you can take on your own to help repair your credit

• Recommends that you don’t contact the credit bureaus directly

A credit privacy number (CPN) is a nine-digit number that’s formatted like a Social Security number (SSN). But a CPN isn’t a substitute for an SSN, even though it’s often marketed as such. Scam artists market CPNs as a way to hide poor credit or bankruptcies or to use in place of an SSN when applying for new credit.

Selling CPNs as a way to repair credit is illegal. And using a CPN on a credit application, no matter how it’s obtained, could put you at risk of committing identity theft.

If you suspect you’re a victim of a credit repair scam, you can file a fraud report with the FTC. You may also choose to file a report with your state attorney general’s office or a local consumer affairs authority.

As the CFPB explains, reputable credit counseling organizations can help by doing things like advising you about your finances, helping you create a budget and presenting workshops focused on money management. They’re often nonprofit organizations, and their counselors are typically certified and trained to help develop a personalized plan for repairing your credit.

The U.S. Department of Justice maintains a list of approved credit counseling agencies that may help you get started.

Repairing credit with responsible use takes time, and your timeline will depend on your situation, where you’re starting and what your goals are. 

If you’re looking to track your progress and get more insights into your credit, CreditWise might be helpful. And if you’re looking for a credit card to help you build credit with responsible use, check out credit cards for fair credit from Capital One.