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Bad credit is a serious problem for countless consumers. Although having a low score isn’t necessarily the end of the world, it can definitely make life much harder for those who want to take out loans, rent apartments or use most financial services. Many people turn to credit repair companies to help them overcome their poor financial track records.

What exactly does a credit repair company do? It all depends on the service in question, but not all firms are worthy of your time or confidence. Here’s how reputable credit repair companies work and what you should look for.

The Basics of Credit Repair

According to the U.S. Federal Trade Commission, credit repair isn’t as simple as many companies claim. For instance, no firm or individual has the legal power to remove information that is accurate and timely from your credit report. Consumer protection law, however, does permit the following kinds of repair actions:

Requesting a Yearly Free Credit Report From One of the Three National Credit Reporting Agencies

In the U.S., three nationwide companies are responsible for credit reporting: TransUnion, Experian and Equifax. You’re allowed to request one free annual credit report from each agency.

Remember that you’re not required to make your requests simultaneously. If you’re in serious credit trouble, it may be best to make individual requests to each agency periodically so that you can keep up with your credit status as it evolves.

Dispute Mistaken or Outdated Credit Report Records

Credit reporting companies and the creditors that provide them with information about your debts are obligated to ensure that their data is accurate. Consumers usually contact both entities to have inaccuracies or partial records corrected.

Requesting a Free Credit Report Following an Adverse Action

Suppose that you apply for a credit card or employment position. If you’re denied based on your credit history, it counts as an adverse action taken against you by the company in question. As long as you request a credit report within 60 days of receiving a formal written notice of an adverse action, you’re entitled to receive it for free.

How Do Credit Repair Companies Operate?

Credit repair companies are only permitted to take actions that consumers can take. While some people prefer to let these firms request reports or petition for corrections on their behalf, this is about the maximum of what you should reasonably expect. Forbes magazine says that credit repair services that promise to do more are often scams.

So how can regular consumers tell the difference between genuine credit repair services and dishonest shakedowns? Sticking to firms that actually adhere to the law is always a good start. Experian notes that credit repair services must follow the 1997 Credit Repair Organizations Act, which forbids them from:

  • Making misleading or false claims about their services,
  • Requesting or suggesting that you attempt to deceive credit reporting agencies,
  • Requesting or suggesting that you alter your identity to hide your credit history,
  • Asking you to sign or attempting to enforce any kind of waiver that forfeits your Credit Repair Organizations Act rights, or
  • Taking your money until they complete the services they offer in full.

The Credit Repair Organizations Act also requires that credit repair companies provide you with a written contract that details all of the services they’re going to provide and their payment terms. The law then gives you three days to back out from the contract.

When Might Credit Repair Firms Help Me?

If you can do everything that credit repair firms can, it begs the question of why you’d want to work with one at all. The answer may be a simple matter of convenience.

While it’s easy enough to get a minor mistake corrected or request a report, some credit repair services help those who don’t have the time to deal with these issues themselves. For instance, myFICO users say that different credit repair companies may offer services like helping you pay off debts or writing appeal letters on your behalf. These services might be helpful depending on your situation and how many inaccuracies your credit reports contain.