Credit Repair vs. Credit Building: What Is the Difference?

Credit repair: correcting what is wrong

Credit repair means getting inaccurate, incomplete or unverifiable information corrected or removed from your credit report. Under the Fair Credit Reporting Act you can dispute that information with the credit bureau and with the business that reported it, and the bureau must investigate for free.

What it cannot do is remove accurate information. The CFPB's summary of the law says a bureau may continue to report information it has verified as accurate. Accurate negative items can generally be reported for seven years, and bankruptcies for 10. A late payment that really happened, correctly reported, is not something a dispute removes.

Credit building: adding new history

Credit building means adding positive payment history. FICO says payment history is the largest category in its score, at 35%, followed by amounts owed at 30%. It also says the importance of the categories may vary from one person to another. Paying on time and keeping balances low relative to your limits speak to those two categories.

Credit-builder loans

The CFPB describes a credit-builder loan as a small loan, typically $300 to $1,000, where the lender puts the loan amount into a locked savings account and you make monthly payments. The lender releases the money back to you, minus any interest or fees, as you pay. The CFPB says the lender reports your payment history to the three major credit reporting agencies as a standard installment loan, though terms vary by lender.

The CFPB's research found these loans did not help everyone equally. People with no existing debt tended to benefit more than people with existing debt. About 40 percent of people who opened the loan made at least one late payment on it, and for borrowers with existing debt, the loan appeared to increase late payments on their other loans. A late payment on any loan can hurt your credit.

Authorized-user accounts

Another route is being added as an authorized user on someone else's account. The CFPB says the account's history is reported for both the account holder and the authorized user, so its whole history can appear on the authorized user's record. It also says newer versions of some scoring models, such as FICO, count these accounts for less than an account in your own name. The account holder's behavior then affects your file, so it only makes sense with someone you trust.

Our tradeline guide explains how these accounts show up on a report.

Which one do you need?

• You see an item that looks wrong: that is a dispute. Start with reading your report, then see the dispute steps.
• Your report is accurate but thin or damaged by real history: that is credit building, and it takes time. No product speeds that up reliably.
• Both: they do not conflict. Disputing an error does not stop you from building new history.

How to spot a credit repair scam

The Credit Repair Organizations Act bars companies that offer credit repair from demanding advance payment, and it prohibits untrue or misleading statements about their services. The statute says a credit repair organization may not charge or receive money before the service is fully performed. The law also requires contracts in writing and gives you cancellation rights.

Be wary of any company that:

• asks you to pay before it has done the work,
• promises to remove accurate negative information, or promises a specific score,
• will not tell you what you can do yourself for free.

You can order your free reports, check them, and file disputes with the bureaus yourself without paying anyone.