Credit Repair 101 - A Lesson for Home Buyers (2024)

By Brandon Cornett | © 2024, all rights reserved | Copyright policy

Did you know that credit repair is one of the most popular topics within the realm of consumer finance? It's true. Each day, thousands of people go online searching for information related to the repair of credit.

What is Credit Repair Anyway?

Before we go any further, we need to clear up some terminology on the subject of credit repair and credit scores. Unfortunately, there is a lot of confusion surrounding this subject, and much of that confusion comes from improper use of terminology.

Basically, the phrase credit repair could refer to one of two things:

1. Correcting mistakes on your credit reports
2. Improving your credit scores through better financial habits

I think the word "repair" is what throws a lot of people off, because it's a general word that can have different meanings. In other words, credit repair could apply to either of the two situations listed above, even though they are two different things.

So let's talk about each one of these topics in more detail, staring with corrections made to a credit report.

Correcting Your Credit Report

Did you know you actually have three different credit reports? It's true. You have one for each of the credit-reporting companies -- Experian, Equifax and TransUnion. The reports are not shared between these companies, but unique to each company. This means that you could have a mistake on credit report but not on the other two. Or you could have the same mistake on all three reports from all three companies.

In turn, your credit score is derived from the information found within your three credit reports. So as you might have guessed, you have three scores as well. It's a bit redundant, I know.

When you buy a home and apply for a mortgage loan, the mortgage lender will check your credit by requesting information from all three of the credit-reporting companies. So it's important for your credit reports to be accurate and free of errors. An error on one or more of your reports (such as a loan that's not yours) could potentially lower your credit score, thus lowering your chances of being qualified for a loan.

So this type of credit repair involves corrections made to your reports. Of course, the first thing you need to do is request copies of your credit report (see the home-buying tools to the right). Only then can you review the information for accuracy. If you find a mistake on one or more of your credit reports, you should submit a dispute on the company's website that produced the erroneous report. For more information on this, see our Home Buyer's Guide to Credit.

So the first aspect of repairing credit refers to your reports. The second form of credit repair has to do with improving your credit score by changing your financial habits for the better. So let's talk about that next.

Improving Your Credit Score

In the first form of credit repair explained above, you are basically fixing administrative mistakes (or possible identity theft issues) that have led to errors on your credit report. It's important to get these things straightened out because the can negatively affect your credit score and possibly harm your chances of being qualified for a mortgage loan.

But what if your credit reports are accurate but your score is still low? In this scenario, you probably have something in your past that is dragging your credit score down. Maybe you have declared bankruptcy in the past, or had a home foreclosed upon, or you simply have a history of missing bill payments. To repair these types of credit problems, you must correct the financial behavior that led to the problem in the first place.

So in this form of credit repair we are talking about improving your scores by being financially responsible (more so than you were in the past). Paying your bills on time, reducing your debt and avoiding new lines of credit can all help you improve your score. For more on this subject, see our Home Buyer's Guide to Credit.

Let's summarize before moving on. Credit repair is a confusing subject for many home buyers because it can refer to two different things. When you make corrections to one or more of your credit reports, you are in a sense repairing your credit overall. Likewise, when you adopt better financial habits you are also engaging in a form of credit repair that will improve your score.

They are two different actions that people often get confused, simply because they are both forms of "repair."

Credit Repair Scams - Beware of Sharks!

In closing, I would like to offer a warning about the many credit report scams that are out there. There are many companies who claim to offer some from of credit repairing service. But in my opinion the majority of them are scams. Here's why:

1. No company can help you improve your credit score. You have to do that yourself by adopting better financial habits, paying bills on time, reducing debt, etc.
2. When these companies talk about their credit repair services they are usually referring to the first topic we discussed above -- making corrections to a credit report. But this is something you can do for yourself. It may be frustrating and it may take time, but you can correct errors on your own credit report if you are persistent.
3. Many of the so-called "credit repair" experts also have a history of unresolved complaints with the Better Business Bureau. This often happens because the company took the customer's money but did not get the credit error resolved in a timely fashion.

I recommend educating yourself on this subject and handling these matters for on your own behalf, instead of paying a company to do what you can do for yourself. I hope this guide to credit repair helps you understand this confusing topic a little better, and I wish you all the best in your home buying experience.

Brandon Cornett is the publisher of Home Buying Institute.