Credit Repair vs. Credit Building: What's The Difference

If your credit isn’t quite where you want it to be, you might be looking for opportunities to build your credit score.

Credit repair may be able to help you achieve your goal, but it’s important to know that credit repair and credit building aren’t the same thing, and there are several things credit repair companies cannot do for you.

In this article we cover:

• Credit repair: what is it?
• Credit repair company warning signs
• Building credit: what is it?
• Combine credit repair and credit building

What is credit repair?

Credit repair is the process of improving a damaged credit history, often by removing inaccurate or unverified information from your credit reports, in an effort to build your credit score.

This information often shows up on your credit reports due to a mistake by or miscommunication with a creditor, or through a mistake made by the credit reporting agencies. Sometimes you may find negative tradelines that are the result of identity theft. Either way, errors like these can negatively affect your credit.

Credit repair organizations provide services that can help you get these items removed from your credit report by working with the credit reporting agencies and the creditor. They typically charge a fee for the service, which can depend on the company and which services you need. However, there are plenty of ways to rebuild your credit yourself at no cost.^[1]

How to repair credit yourself

If you want to avoid a paid credit repair service, you can address any inaccurate information on your accounts yourself by disputing them with the credit reporting agencies and the creditor.

You cannot remove any negative information on your credit report that is accurate and current, and neither can a credit repair company.^[2]

Credit repair services: what to watch for

Reputable credit repair companies can help you take steps to get some negative information removed from your credit reports. It’s not a guarantee though, and anything a credit repair company can do legally, you should be able to do yourself for free or with little cost.

Information from the FTC states that it is illegal for credit repair services to charge you before helping you, or to lie about what they can do for you. They also have to explain your legal rights to you in a written contract which includes the following details:

• The services they will perform for you
• How long it will take to get results
• The total cost you will pay for their service
• Any results that they guarantee
• Your three-day right to cancel without any charge (including a written cancellation form)
  ^[2]

Credit repair scams

Watch out for red flags that a credit repair service may not be legitimate. If you see an ad promising that the service can help you improve your credit score immediately or by a certain amount, it could be a scam.

According to the FTC, some signs you could be dealing with a credit repair scam include:

• They insist you pay them before they’ll help you
• They don’t explain your legal rights when they tell you what they can do for you
• They tell you not to contact the credit bureaus yourself
• They tell you to dispute information on your credit report that you know is accurate
• They tell you to file a false report of identity theft
• They tell you to lie on credit or loan applications
  ^[2]

What is credit building?

Credit building is essentially any activity that can help build good credit. While credit repair goes back and removes inaccurate items from your credit history, credit building focuses on adding new, positive information to your credit report instead.

Keep in mind though, when it comes to credit, there aren’t any quick fixes. Both rebuilding your credit and repairing credit can take time.

In general, the process of building credit begins with finding out where you stand. Start by getting access to your credit score. You can access your Equifax credit score for free at MyFICO, or see your FICO score with a free Experian account.

Also, get a copy of your credit report from one or more of the major credit reporting agencies. You can get a free copy every week from Experian, Equifax, and TransUnion through AnnualCreditReport.com.

Factors that impact your credit score

Once you have the information you need, look at the information on your credit report to spot areas where you can improve. You may want to focus on the factors that affect your FICO credit score, which include:

• Payment history
• Amounts owed
• Length of credit history
• New credit
• Credit mix
  ^[3]

Payment history

35% of your FICO score is based on your payment history, making it the most important factor. If your credit score has dropped because of some late payments or collection accounts, work to get those accounts current as quickly as possible and make your monthly payments on time.

While that won’t get rid of the negative information on your credit report, making your payments on time and in full each month can help you establish a positive payment history going forward. ^[3]

Amounts owed

This factor makes up 30% of your FICO score and is primarily driven by your credit card utilization rate. Credit utilization rate is calculated by dividing a credit card’s balance by its credit limit. So if you have a card with a $2,000 balance and a $10,000 limit, its utilization rate is 20%.

Many credit experts recommend keeping your credit utilization rate below 30% and some go as far as recommending keeping the rate at 10% or lower, but there’s no hard-and-fast rule with the FICO score. Instead, the lower the credit utilization rate is, the better. However, be careful if your credit utilization ratio is 0% as not using any of your available credit could prevent you from achieving maximum credit score points in this category.^[4]

If you have high credit card balances, work on paying them down as quickly as possible to reduce your credit utilization ratio.

Length of credit history

15% of your FICO score is attributed to the length of your credit history, and takes into account how long your credit accounts have been established including the age of your oldest and newest accounts, and the average age of all of your accounts. It also considers how long specific accounts have been established and how long it has been since you last used certain accounts. ^[3]

As you continue to use credit over time, your overall length of credit history will increase.

New credit

Almost every time you apply for a credit account, the creditor does a hard inquiry on your credit report, which can impact your credit score. If you apply for a lot of credit accounts in a short period, though, the effect on your score can be compounded. In total, new credit accounts for 10% of your FICO credit score.^[5]

As with the average age of your credit accounts, the best thing you can do for this factor is to avoid applying for credit unless it’s necessary. And if you’re applying for a mortgage or auto loan, try to do your rate shopping within a period of 14 to 45 days. That way, all of your inquiries will be consolidated into just one on your credit report. However, if you’re shipping for two different types of loans, like a mortgage and an auto loan, these will count as two separate inquiries.^[6]

Credit mix

This final factor also makes up 10% of your FICO score and is based on the types of credit you have. In general, it's a good idea to have a good credit mix, including credit cards, mortgage and auto loans, student loans and more.

However, this doesn’t mean you should start applying for all of the different loans or lines of credit you don’t currently have. According to MyFICO, applying for multiple new lines of credit in a short period of time could indicate to a creditor that you are experiencing financial distress, whether this is true or not.^[7]

Using this information to build credit

Once you’ve identified the areas of your credit you need to work on, you can take steps to help you build credit and work towards your credit score goals. These steps can include making on-time payments, spending below your credit limit and maintaining a healthy mix of credit accounts. ^[8]

You could also consider options like getting a credit builder loan or a secured credit card. Just make sure you only get credit building products you can manage responsibly.

How to use credit repair and credit building together

Depending on the situation, you could use either credit repair, credit building, or a combination of the two to build your credit score. As you look through your credit report, keep an eye out for any accounts you don’t recognize, keeping in mind that some creditors may use a different name on your credit report than they do publicly. When in doubt, ask your lender first.^[9]

If you find inaccurate information on your credit report, consider addressing it yourself first through the credit bureau dispute process and by contacting the creditor.
Once you file a dispute with one of the three national credit bureaus, this will trigger an investigation process by the Fair Credit Reporting Act (FCRA). The FCRA requires credit bureaus to complete dispute investigations within 30 to 45 days.

Credit bureaus must investigate and resolve disputes within 30 days of receiving them, but if you submit additional information on your dispute during the 30-day window, the credit bureau may take up to a total of 45 days to complete its investigation.^[10]

The bottom line

If you have both legitimate and inaccurate information on your credit report that is negatively impacting your credit score, credit repair and other credit building efforts can work hand in hand to get your bad credit back on the right track. However, it’s important to understand the limits of each, as well as the costs and how long it takes until you’ll start to see signs of improvement.

As you look for ways to rebuild your credit, it’s important to consider all of your options to find the path that works best for you.

Build your credit, don't just repair it. Download the Self app to get started.

Sources

1. Experian, “How Do Credit Repair Companies Work?” https://www.experian.com/blogs/ask-experian/how-do-credit-repair-companies-work/
2. FTC, “Fixing Your Credit FAQs” https://consumer.ftc.gov/articles/fixing-your-credit-faqs#repair
3. MyFICO, “How Are FICO Scores Calculated?” https://www.myfico.com/credit-education/whats-in-your-credit-score
4. MyFICO, “What Should My Credit Utilization Be?” https://www.myfico.com/credit-education/blog/credit-utilization-be
5. MyFICO, “How New Credit Impacts Your Credit Score” https://www.myfico.com/credit-education/credit-scores/new-credit
6. Consumer Finance, “How Will Shopping for a Loan Affect My Credit?” https://www.consumerfinance.gov/ask-cfpb/how-will-shopping-for-an-auto-loan-affect-my-credit-en-763/
7. MyFICO, “Types of Credit and How They Affect Your FICO Score” https://www.myfico.com/credit-education/credit-scores/credit-mix
8. MyFICO, “How to Build Credit” https://www.myfico.com/credit-education/credit-scores/how-to-build-credit
9. Consumer Finance, “I don't recognize the name of a creditor listed on my credit report. Should I dispute this listing?” https://www.consumerfinance.gov/ask-cfpb/i-dont-recognize-the-name-of-a-creditor-listed-on-my-credit-report-should-i-dispute-this-listing-en-1331
10. Experian, “How Long Will It Take to Repair My Credit History?” https://www.experian.com/blogs/ask-experian/how-long-will-it-take-to-repair-my-credit-history/

About the author

Ben Luthi is a personal finance writer who has a degree in finance and was previously a staff writer for NerdWallet and Student Loan Hero.

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