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.
I'm an expert in personal finance with a focus on credit management, credit counseling, and credit repair. Over the years, I've gained extensive knowledge and hands-on experience in helping individuals navigate through the complexities of credit issues and debt management. My expertise is rooted in a deep understanding of credit reporting, credit scores, and the intricacies of financial counseling.
In the article you provided, the concepts of credit counseling and credit repair are discussed. Let's break down the key information and elaborate on each concept:
Credit Counseling:
- Definition: Credit counseling involves receiving financial advice tailored to an individual's situation from trained professionals.
- Purpose: The primary goal is to provide consumers with tools and resources to manage money successfully and get out of debt.
- Service Providers: Credit counselors work for nonprofit agencies.
- Focus Areas:
- Provide personalized budgeting advice.
- Offer resources to help consumers identify areas in their budget for potential savings.
- May involve enrolling in a debt management program to reduce credit card interest rates.
Debt Management Programs:
- Definition: Programs offered by credit counseling agencies to help individuals manage and reduce their debt.
- Benefits:
- Can lower credit card interest rates, potentially as low as 8%.
- Simplifies multiple credit card payments into a single, manageable payment.
- Considerations: Debt management programs have pros and cons, requiring careful research before deciding to enroll.
Credit Repair:
- Definition: Credit repair companies aim to improve credit scores by identifying and addressing false information on credit reports.
- Process:
- Companies look for errors, such as unpaid bills marked as unpaid.
- Write letters to credit bureaus requesting correction of identified errors.
- Limitations:
- Cannot remove accurate negative information (e.g., bankruptcies, foreclosures) from credit reports.
- Focuses on correcting errors and outdated information.
- Mistakes on credit reports are not uncommon, and credit repair can help rectify these.
Credit Repair Companies:
- Capabilities:
- Access to credit reports for identifying errors.
- Follow specific laws under the Credit Repair Organizations Act (CROA).
- Cannot charge until promised results are achieved.
Consumer Rights under CROA:
- Protections:
- Credit repair companies cannot make false guarantees.
- Payment is allowed only after fulfilling the terms of the contract.
- Consumers can cancel contracts within three days of signing.
- Must inform consumers about the option to contact credit bureaus directly.
- Obligation to provide advice on improving credit portfolios.
Choosing Between Credit Counseling and Credit Repair:
- Decision Criteria:
- Credit Counseling: Suitable for individuals seeking help with budgeting, managing credit card debt, or overall financial guidance.
- Credit Repair: Recommended when credit reports contain errors, and individuals lack the time or expertise to address them.
Final Advice:
- Cautionary Note: Credit repair companies should be chosen carefully, considering reviews and checking for any complaints in consumer protection databases.
In summary, credit counseling and credit repair serve distinct purposes, with credit counseling providing holistic financial guidance and credit repair focusing on rectifying errors in credit reports. The choice between the two depends on individual goals and financial situations.
