Which Option Is Right for You: Credit Repair or Credit Counseling?

Anyone can be impacted by bad credit, and it can follow them around for years if it isn’t addressed. Credit repair and credit counseling services are both valid options for individuals with credit issues, but these services are fairly different.

Anyone can be impacted by bad credit, and it can follow them around for years if it isn’t addressed. Credit repair and credit counseling services are both valid options for individuals with credit issues, but these services are fairly different. Each of these services intends to help a person find a route back to having good credit, but the actual route taken is quite different. Having a solid understanding of the differences between credit repair and credit counseling can help you decide which type of service will help you best. 

What Is Credit Repair?

Credit repair companies usually start their services with a customer by combing through the individual’s credit history. The credit repair company tries to find negative items that are inaccurate or false and will then proceed to file disputes with the credit bureaus to have those items removed from your report. 

Negative items on your account that don’t belong to you, like an outstanding debt or a late payment, can bring down your credit score significantly, so it’s crucial to dispute these if they exist. Additionally, if your credit report has a valid negative item but includes incorrect information (such as a wrong debt total or the wrong dates), this can be disputed as well. 

Every time you dispute a negative item, the creditor or the credit reporting agency must launch an investigation and verify the negative item within 30 to 45 days. If they are unable to do so, the item is removed from your credit report, and your credit score can be impacted positively. 

Credit repair companies charge a fee for their services. While you could file a dispute yourself, you might hire a credit repair company for various reasons. First, it can take a long time to access your credit reports from each credit reporting agency, analyze the information and file disputes. You’re essentially paying someone so you don’t have to do all that work yourself.

Second, credit bureaus can dismiss disputes quite easily. A credit repair company understands how to file a dispute that has a higher chance of being reviewed and investigated, so you benefit from their years of experience in dealing with the credit bureaus. They know consumer rights under the Fair Credit Reporting Act (FCRA), so they have a better understanding of which parts of your credit report can be disputed. 

Credit repair companies have to follow specific laws that have been put in place under the Credit Repair Organizations Act to protect consumers. Some of these laws include:

  • Credit repair companies cannot make false guarantees.
  • These organizations cannot ask upfront for payment for their services.
  • These companies must allow (and advise consumers) that the contract for services can be canceled within three business days of signing it.
  • Credit repair companies cannot suggest you get, or help you acquire, a new identity as a means to improve your credit.

Overall, credit repair companies can help you increase your credit score, especially if you believe there’s incorrect information on your credit report. It’s important to note that no one, including credit repair companies, can remove accurate negative items from your credit report. 

What Is Credit Counseling?

Credit counseling is a form of service that looks at your financial situation and helps you build an individualized plan to improve everything. Although it is called “credit” counseling, these services don’t focus on your credit at all. Instead, they will look at your budget, income, financial obligations and more. The counselors who help you are specifically trained and certified in dealing with debt issues. 

Credit counseling helps to give consumers the tools they need to get out of a bad financial situation. The idea is to educate consumers about budgeting and financial skills so they can feel empowered to fix the problem, get out of debt and stay out of debt. It also teaches them how to manage money effectively so they can continue making smart financial decisions even after they resolve their debt. 

A credit counselor will dive deep into your current financial situation, as well as the past financial choices that have gotten you to where you are. They will force you to look at decisions with more thought and analyze what you can do without. For example, they might point out credit cards with high interest rates that can be swapped out or subscriptions that aren’t necessary and can be canceled. 

A credit counselor will typically start by reviewing your credit report, income, assets and expenses. Next, they may discuss your future goals and offer suggestions such as debt management plans or consolidation options to achieve those goals. They can also help tackle specific issues such as student loan debt, saving for a home, the decision to pursue bankruptcy and more. 

Credit counseling is typically offered by not-for-profit organizations that may extend their services for free or for a small fee. There are for-profit organizations that provide credit counseling, but most states have limitations on how much they can charge for their services. If you choose to go with a for-profit credit counselor, make sure they’re recommending options that are in your best interest and not for the benefit of their company. 

Similarities and Differences

Credit repair and credit counseling may sound like similar services, but in reality, they have more differences than similarities. The only real connection is that they’re both designed to help you with your financial situation. 

The differences between these two services are significant. Credit counseling takes a holistic approach and looks at your entire financial situation, including your income, debts, assets and more. The company will teach you how to get out of debt and improve your financial situation, but it won’t take direct action to improve your credit score with the credit bureaus. 

On the other hand, the credit repair agency focuses entirely on your credit report and takes actions on your behalf. It won’t teach you how to avoid future mistakes that lower your credit score; it just focuses on reversing what it can for an immediate credit score improvement. 

It’s important to note that you can take most of the actions a credit repair organization does on your own. For example, it’s within your legal rights to file your own dispute (although the credit repair company may do it better). On the other hand, you likely don’t have the expertise to do what a credit counselor can do. 

Which Option Is Right for You?

As these services are quite different, it’s recommended you start by identifying what you need and what your financial goals are. If your issue is questionable negative items on your credit report, then a credit repair company may be your best choice. On the other hand, if you need professional help with your financial situation overall, including coaching and guidance, a credit counselor might be a better option. 

Keep in mind what you can do on your own and what you need professional help for. If you have a single negative item on your report that you might think is easy to dispute, it might be simple enough for you to tackle on your own. 

Lastly, set a budget from the start and do some comparison shopping. Find a solution that fits into your budget. The last thing you need is to go into debt trying to better your financial health. 

No matter what you pick, make sure you do your research. There are great credit repair and credit counseling vendors, and then there are those that take advantage of their customers. Look up reviews before you sign up with a company, and make sure you understand your rights. Credit repair organizations and credit counselors have limitations on what they can charge or when they can ask for a payment, so don’t fall for schemes that look to get around these laws. 

Learn More

Options for Managing Debt

Many Americans are struggling with thousands of dollars’ worth of debt due to things like mortgages, car loans, student loans, credit cards and other types of personal debt.

Read More »