Editorial Policy

Clean up your credit for free: Do it yourself

Erica Sandberg

January 6, 2015

QHi Erica,

Where should I go to clean up my credit for free? –Mark

ADear Mark,

Walk over to a mirror and gaze in. See that guy? He's the person who has the power to fix mistakes and problems on your credit reports, all at no charge.

Your first step is to pull your credit reports for free at AnnualCreditReport.com. You will get a report from the major credit bureaus, Equifax, Experian and TransUnion. Comb through your reports for inaccurate and negative information.Ask Erica

Know that cleaning up your credit takes time, and generally paying and trusting that someone else will do what you can do for yourself is a waste of time and money. Your priority should be to clear up any legitimate errors on your report (such as disputing accounts that aren't yours), and to pay off as much of your debt as you can, then keep it paid off. You should also know that no one can fix legitimate marks on your report that are hurting your credit, such as late payments, nonpayments or judgments or defaults. Only time will fix those.

If it's high balances you are having problems with, nonprofit credit counselors are a good first stop. Their services are free or they charge a nominal fee, and they can help you consolidate debt, although this solution is not right for everyone, because you have to have the funds to pay down on your debt.

There are companies that specialize in “credit repair,” but they provide a service to turn a profit. Some are debt settlement companies that help clients negotiate legitimate debts down, while others dispute information that's appearing on your credit report.

Let's say you have a $5,000 credit card debt that you never paid. The issuer sold the debt to a collection agency at a loss. If you hire a settlement company, it will contact the collector, persuading it to accept just $2,000 (which you have to come up with) to consider the matter closed. In that case, your credit report would indicate that you've satisfied the obligation. Eliminating such a substantial debt would probably increase your credit rating a bit, as the amount you owe in relation to what you can borrow is a major scoring category: Owing little or nothing at all is ideal. However, a settled debt is reported on your credit with a note stating it has been settled for less than the amount owed, which is considered a negative.That note cannot be removed, nor can the late payment notations associated with the debt be removed. It takes seven years for that stuff to fall off your credit report.Some debt settlement companies are law firms. If they take you on as a client, they may charge an initial fee, then additional fees after completing their tasks. Is it worth the price? It can be. In the example above, you'd save $3,000 (though you might have a larger than expected tax liability, as forgiven debt over $600 is typically considered income.) A few hundred bucks paid to the company that takes on the duties of calling the collector, bargaining, and completing and tracking paperwork may be money well spent.

Still, they do nothing for a fee that you can do for free. Therefore, if you want to settle your debt yourself, you absolutely can. It just takes time and effort. Consider it as you would housework. You can scrub your own home or you can hire a professional cleaner. The choice is yours.

Call the debt collector or card issuer, and offer to pay a reduced amount in a lump sum, or ask if you can set up a payment plan. Just make sure you stay calm, don't let the collector make you feel ashamed or guilty (because that weakens your bargaining power), and get in writing what you agree on.

The second type of credit repair has more to do with expunging negative information from a credit report, thus “cleaning it up.” These companies often show as popup ads when you're online, or advertise on flyers and billboards around town. Their claims are usually along the lines as being able to erase data that's holding you back from getting more loans and credit cards. Of course, these companies also charge for what they do, but rarely (if ever) do I suggest using one.

Only accurate and timely information should appear on your credit report. That means that you have the right to dispute inaccuracies with the credit bureaus, such as accounts that aren't yours or those that should have dropped off because they are damaging and too old (seven years in most cases). The dispute process is free and takes 30 days. If they determine that you are in the right, your file will be updated.

The fact is, no person or company can legally remove accurate information that is within the legal time frame. For example, if you have a $300 hospital bill that landed in collections two years ago, it will stay on your report for another five. What can you do? Pay what you owe so your report indicates that you satisfied the debt in full, or settle the account for less. If you choose to hire a company to do it for you, make sure the price is right in relation to how much they can save you.

Don't contract with anyone to purge correct or current bad debts, or attempt to do so yourself. Random disputes are illegal. And I'm sure that when you see your image in the mirror, you want it to reflect an honorable man — not a scam artist.

Got a question for Erica? Send her an email.