Credit Counseling vs. Credit Repair
They sound like different ways of saying the same thing, but credit counseling and credit repair are two completely different strategies for lifting yourself out of debt.
Credit counseling is financial advice from trained professionals. Credit counselors work for nonprofit agencies to give consumers resources that help them manage their money successfully so they get out of debt.
Credit repair companies, on the other hand, zero in on your credit report. Their only purpose is to root out any false information lingering on your credit report. Don’t expect a credit repair company to fix you a monthly budget, consolidate your credit card debt or work on lowering your interest rate. That’s not their gig.
It’d be nice if the two strategies could come up with more creative names, but for now, you’ll just have to do your best not to mix them up. Below, we’ll clear up a few more of the similarities and differences between credit counseling and credit repair.
What Is Credit Counseling
Credit counseling is financial advice personally tailored to your situation and it comes attached to a pack of resources.
The whole point is to provide consumers with all the tools necessary to maneuver themselves free of debt. Talking to a credit counseling agency is free and their advice on budgeting is priceless.
A credit counselor will force you to ask yourself if you really need that $9.99/month ($120 a year) Spotify account, or could you get by with the ads that pop up in the free version? They will help you find other places in your budget where you could create some savings that could be applied to paying down your debt.
If you decide to go further than a counseling session, you may have the option to enroll in a debt management program. Debt management programs can reduce your credit card interest rates to as low as 8%!
The average credit card interest rate is around 20% as of February 2020. The average penalty interest rate (which is probably what you’re paying if you’re considering consolidation) is a tick below 30%.
You’d be hard-pressed to find credit card interest rates in the single digits, not to mention the benefit of having all your cards consolidated into one simple payment.
Debt management programs come with their own set of pros and cons, so do your research and think it over before deciding if it’s right for you.
What Is Credit Repair
Credit repair companies promise to improve your credit score by removing false information from your credit report.
Here’s the thing about credit repair companies: They do nothing that you can’t do yourself.
There is no magic eraser that will lift the stains off your credit report. Credit repair companies simply look for errors (like unpaid bills that were actually paid) and write letters to the credit bureaus requesting that they correct these errors.
They can’t erase negative information just because it’s negative. Bankruptcies, foreclosures and overdue payments all blemish your credit report, thus weighing down your credit score for a time. No amount of “credit repair” can change that.
These things take time to get better. However, the more time that has passed since a negative mark like a bankruptcy or repossession, the less damage it reflects on your score.
A fresh bankruptcy scares off lenders a lot quicker than a bankruptcy suffered three or four years ago.
What credit repair companies can do, however, is get the credit bureaus to remove information on your credit report that shouldn’t be there.
A chapter 7 bankruptcy can tarnish your credit report for 10 years, chapter 13 stays on the report for seven.
However, mistakes are bound to happen. According to a study done by the Federal Trade Commission, one in five people have an error on their credit report.
A credit repair company would spot this error and write a letter to the credit bureau demanding that they remove the false information from your credit report. Aside from the most extreme situations, this is something most consumers could handle themselves.
Remember, credit repair companies will have access to your credit report. That is a lot of sensitive information in one place. If you hand it over without making sure you’re dealing with a reputable company, you risk falling prey to a credit repair scam or even identity theft.
Read multiple reviews from different websites before going through with a credit repair company. You should also scan the Consumer Financial Protection Bureau’s complaint database for the company’s name before agreeing to any contracts.
Differences Between Credit Counseling and Credit Repair
The only thing similar between credit counseling and credit repair is that they’re both designed to help you get a grip on your finances.
Credit counseling takes a more holistic approach, analyzing your income, expenses and total debts. They teach you how to budget, which is essential to getting out of debt and maintaining a healthy credit score.
On the other hand, credit repair’s only concern is your credit report. You hire someone to scan your credit report for false or outdated information. If they find anything out of order, they’ll alert the credit bureaus.
Once again, any consumer can take a look at their credit reports and recognize a bankruptcy that should no longer be there, or late payments that were actually on time. There is no special stamp needed to get in touch with the credit bureaus. Anyone, including yourself, can write them a dispute letter.
Credit repair companies must follow special laws meant to protect consumers.
This means they can’t charge you until after they’ve gotten the results they promised. Don’t listen to anyone (credit counselor or credit repairman) who says they can automatically improve your credit score. Not even the CEO of FICO has that kind of power.
Here are some of your rights under the Credit Repair Organizations Act (CROA):
- Credit repair companies cannot make false guarantees. They can’t lie to you about what they can and can’t do.
- They cannot accept payment until after they’ve completed all terms of the contract, i.e. removed everything from your credit report they said they would.
- They must allow you to cancel your contract, no questions asked, within three days of signing it.
- They have to inform you that you can contact the credit bureaus yourself.
- They are obliged to give you advice on how to improve your credit portfolio.
- Also, credit repair companies cannot advise you to lie about your credit history or alter your identity. Yes, this was actually written into the law. So, if you were looking for advice on how to change your EIN or SSN, you’re out of luck.
Which Option Is Right for You?
What are your goals?
If you need help weaving through some messy finances, climbing out of credit card debt or simply drawing up a budget, credit counseling is right for you.
If your credit report is riddled with errors and you don’t have the time or patience to look into them (and you don’t mind spending a little money), then call up a credit repair company.
Keep in mind that credit repair companies only tackle credit reports. So, if your credit report is error-free, but your credit score is still abysmal, then there’s not much they can do for you.
A nonprofit credit counseling agency, however, is just a click away. Chances are, there’s something they can do to help.
Bents Dulcio writes with a humble, field-level view on personal finance. He learned how to cut financial corners while acquiring a B.S. degree in Political Science at Florida State University. Bents has experience with student loans, affordable housing, budgeting to include an auto loan and other personal finance matters that greet all Millennials when they graduate. He has a prodigious appetite for reading, which he helps feed with writing from Scottish philosopher Adam Smith, the “Father of Capitalism.” Bents writing also has been published by JPMorgan Chase, TheSimpleDollar and Interest.com.
- Fiano, L. (2019, February 5) Common errors people find on their credit report - and how to get them fixed. Retrieved from https://www.consumerfinance.gov/about-us/blog/common-errors-credit-report-and-how-get-them-fixed/
- N.A. (2019, December 3) Don’t Be Misled by Companies Offering Paid Credit Repair Services. Retrieved from https://files.consumerfinance.gov/f/documents/092016_cfpb_ConsumerAdvisory.pdf
- N.A. (ND) Chapter 7 & 13: How long will negative information remain on my credit report? Retrieved from https://www.myfico.com/credit-education/faq/negative-reasons/how-long-negative-information-remain-on-credit-report
- Dilworth, K. (2020, February 5) Average credit card interest rates: Week of Feb. 5, 2020. Retrieved from https://www.creditcards.com/credit-card-news/rate-report.php