Credit repair…to do or not to do, that is the question. The answer…it’ll could be a waste of time and money. Stay tuned, I’m going to give you the good, bad, and ugly on credit repair so you can decide if it’s a good option for you or not.
So it’s important that we start by explaining how credit repair works, and why it used to be an incredibly effective tool for helping you qualify for financing. The typical technique is pretty simple. Credit repair agencies will reach out to credit bureaus on your behalf, and challenge the validity of a derogatory item being reported on your credit report.
The credit bureau will then connect with the creditor and have them validate the accuracy of their reporting. They generally have about 30 days to respond. During this time the account is considered in a “disputed” status. If they fail to certify their reporting in the timeframe allotted, the credit bureaus are required by law to remove that item from your credit report.
But there’s something interesting that happens the moment this account investigation process begins. The credit bureaus have a scoring model/formula they use to determine your credit score. It takes into account your entire credit profile. But the moment an account is in dispute status, they omit it from consideration in the scoring formula.
This can cause a temporary jump in your credit score almost instantly. That’s why credit repair used to be such an effective tool for helping you qualify. Even if the credit repair agency was challenging accurate reporting on a derogatory account that would eventually be verified, if you could time your loan application (and subsequent pulling of your credit) within the timeframe that the derogatory account was in a disputed status you could essentially fool lenders into believing you had a better credit ranking than you actually did.
But nothing lasts forever. Lenders eventually got hip to this technique. So now when you apply for a mortgage, after the lender pulls your credit they will look for disputed accounts. If any of these disputed accounts currently have a balance they will request that you contact the credit bureau and remove your dispute of those accounts. Once the disputes are cancelled they will repull your credit so they can get an accurate reflection of your credit score.
So the credit repair quick fix is a thing of the past in most cases. If it doesn’t result in a derogatory account being removed from your credit report, then your efforts are wasted. Understand that record keeping has changed with America’s banks thanks to technology.
Let’s say you were a college student in the early 90s that completed a pamphlet application for a credit card at a booth on campus, that you eventually ran up and defaulted on. You may be able to have a credit repair agency claim that the account wasn’t yours, and is reported on your credit profile in error.
What are the odds that someone can go down into the basement archive and find the handwritten application you filled out back then? Pretty slim in some instances, especially if that documentation hasn't been imaged. That’s why this technique used to be so effective.
But for the last decade plus, everything we do is digital. It’s easy to keep and readily access records. It makes it much easier for creditors to validate the information they report on accounts. So odds are if it’s a legit derogatory account, it likely isn’t going anywhere.
Are there exceptions? Absolutely! Credit repair agencies typically have greater success with the removal of old accounts, accounts with zero balances, and they do especially well with medical collections. That being said, what’s most impactful on your credit report is what’s happened most recently.
So the impact of having an old derogatory account removed from your credit report can be marginal at best. That being said if the only thing dragging your score down is medical related collection accounts, by all means hire a credit repair agency. Medical collections can be incredibly hard for agencies to validate.
HIPAA laws regarding privacy of medical information limit their ability to share some of the details of your debt with the credit bureaus. Which often results in the account not being verified and thus deleted from your report altogether.
So my point in all this is to say be careful with credit repair. Any mortgage lender worth his salt should be able to run your credit report through a simulator, and give you an idea of what impact having some accounts removed from your credit report will have on your score. This will help you determine if you should entertain credit repair.
Often what’s more important than credit repair is credit rebuilding. These are two entirely different things. One is focused on removing the impact of mistakes you may have made in the past. The other is more focused on showing you’re able to responsibly manage credit now. Starting the process of rebuilding your credit is often far more impactful than attempting to repair it.
Here's the good news for veterans though. The VA doesn’t require you to have anything near perfect credit to qualify. To the contrary, the VA does not have a minimum credit score requirement. If a lender tells you otherwise, know it’s their specific requirement not the VA’s.
The VA knows that some veterans have made mistakes in the past. What’s most important is that you show you’ve turned the corner. You do that by paying all your bills on-time for 12 months. If your credit report shows that you haven’t incurred any late payments or collections in the last year, you’ll have a strong chance of being approved even if your credit score has yet to rebound.
So in all honesty you may not need credit repair at all. Know that the VA considers open collection accounts with outstanding balances as derogatory accounts. So it may be time to call those collection agencies and settle, or set up a repayment agreement.
For those of you who really have anxiety about your credit and want to know what you should do to improve it be sure to check out my video on “Hacks to Quickly Improve Your Credit” for more information on techniques to help rebuild your credit.