A good credit history can help you buy a new car or qualify for a mortgage with favorable interest rates. But what happens if your credit score has taken a hit?
Credit repair takes time and may require careful planning. An issue that many of our valued members have raised with us has to do with credit repair scams. Would you recognize a scam if you saw it?
With that in mind, our Addition Financial experts have put together this guide to help you identify and avoid some of the most common credit repair scams.
What is a Credit Repair Company?
A credit repair company is a for-profit business that works to improve clients’ credit scores by getting negative items removed from their reports. These companies operate legally in 49 states, with Georgia being the only exception. In Georgia, credit repair is considered to be a misdemeanor.
Companies that offer credit repair service are governed by a federal law called the Credit Repair Organizations Act or CROA. They must adhere to standards laid out in the law and refrain from activities that are prohibited.
Under CROA, credit repair companies must do the following things:
- Notify customers that they have a legal right to dispute the information on their credit reports for free.
- Notify customers that while credit bureaus are required to maintain accurate information about consumers, errors sometimes occur.
- Notify customers that they have the right to sue a credit repair company if they violate the terms of the CROA.
In addition to these requirements, there are also some prohibitions that govern the way credit repair companies work. For example, they are not allowed to advise consumers to make false statements to credit bureaus or to change their identification to “escape” from an unfavorable credit history. They are also prohibited from charging fees for services that haven’t been fully rendered and from guaranteeing that they can remove negative information from any credit report.
What Does a Credit Repair Specialist Do?
A credit repair specialist contracts with consumers to intervene on their behalf with credit bureaus and creditors. They may contact the credit bureaus directly to dispute information, or they may reach out to individual creditors, including credit card companies, retailers and banks and credit unions.
In most cases, credit repair companies contact the credit bureaus and creditors by mail. That might seem strange in our age of electronic communication but there is a reason that mail communication is preferred. Under the Fair Credit Reporting Act, creditors and credit bureaus have 30 days to process disputes or the item being disputed will be removed automatically. They will often send multiple, even frivolous requests in a tactic called “jamming,” hoping that the sheer volume of correspondence will make them miss a letter. You should know that if a bureau identifies a request as frivolous, they may stop their investigation.
How Much Do Credit Repair Services Cost?
Under the CROA, credit repair companies may not charge for services that haven’t been rendered yet. They generally charge in two ways:
- They put customers on a monthly subscription and bill at the end of the month for any services delivered during the month.
- They use a “pay per delete” service and charge only for services rendered at the time they are rendered.
With the former billing model, there is an incentive for credit repair companies to keep customers on the hook as long as possible. With the latter, the incentive is usually to deliver services quickly, so they can be billed.
What Are Credit Repair Scams?
Now that you understand what a credit repair company does, let’s talk about some common credit repair scams and how you can identify them. It might not surprise you to learn that credit repair fraud shares a lot in common with other types of scams. They rely on grandiose promises and vague language. Here are some examples.
#1: They Ask You to Pay in Advance
The first warning sign of a credit repair scam is a request to pay upfront for services that have not yet been delivered. As we stated above, the CROA prohibits credit repair companies from demanding payment in advance. Legally, they may only charge for services rendered.
A legitimate credit repair service will charge you in one of the two ways we mentioned in the previous section: they will bill you at the end of the month on a subscription basis for services rendered, in most cases between $50 and $100; or, they will charge on a pay per delete basis. The latter is preferable if you want your credit to be repaired quickly and you want to avoid prolonging the process.
You should also know if the company uses telemarketing and falls under the Telemarketing Sales Rule, they may not request or receive payment until after six months, at which point they must show you a report that shows the results.
#2: They Promise a Specific Increase in Your Credit Score
Both FICO and Vantage use proprietary algorithms to determine your credit score. Various factors apply, but some of the most important are your credit payment history and your credit utilization.
While disputing inaccurate information can improve your score, no reputable credit repair service can guarantee or predict the effect their work will have on your score. If somebody promises to increase your score by any amount, you should avoid providing them with your information and look elsewhere for the help you need.
#3: They Promise to Remove Negative Information from Your Credit Reports
There’s a process involved in disputing and getting information removed from your credit report. If you see an item that you feel is inaccurate, you can dispute it and if you can prove that it doesn’t apply to you, the credit bureaus will remove it.
That said, no credit repair company can fix bad credit by removing legitimate items from your credit report. If you accrued high credit card debt and were delinquent in paying it, the negative information on your report is valid and nobody can promise to delete it.
#4: They Pressure You to Dispute Accurate Information on Your Credit Report
While credit bureaus have a responsibility to ensure that the information on your credit report is accurate, mistakes can happen. For example, your credit report might include information for another person with the same name as you. If you have been a victim of identity theft or credit card fraud, then there might be accounts that were opened without your knowledge or permission.
However, if you have struggled with your credit and have delinquent accounts, write-offs, judgments or liens, no credit repair company should encourage you to dispute them. Their job is to provide information to prove that disputed items are invalid and to follow up as needed with the credit bureaus or individual creditors.
If a company asks you to dispute legitimate items, it’s a sure sign that they are running a credit repair scam.
#5: They Mislead You or Withhold Information About Your Rights
Every United States citizen has rights regarding their personal financial information and credit. For example, you may receive a free copy of your credit report from all three major credit bureaus once a year. You also have the right to contact the credit bureaus directly and dispute any item on your credit report.
Sometimes, credit repair scams dupe people by not telling them that they can dispute charges without paying a fee. Any failure to disclose your rights is a sign of a credit repair scam.
When to Hire a Credit Monitoring or Credit Repair Service
Understanding the signs of a credit repair scam is essential, but here’s what you need to know about when you might need help repairing your credit.
The first circumstance is if your identity was stolen or compromised or you’ve been a victim of credit card fraud. In such cases, it may be worthwhile to spend a little money to relieve your stress and have a professional deal with your creditors on your behalf. However, we should note that you may also need legal advice to ensure that you have addressed every issue related to the theft.
The second is if you have proof that contradicts information on your credit report. For example, sometimes creditors neglect to report payments and the result is that a debt stays open and shows as a delinquency. Errors like this are easy to remove and if you’d prefer someone else to handle it, a credit repair service can help.
The third is if you are planning to buy a home or a new car and you want to make sure your credit score is as high as possible before you approach lenders. Because a big purchase can also come with significant stress, it may be helpful to take a step back from the situation and let somebody else do the legwork of repairing your credit.
If you need help repairing your credit, it’s useful to work with a credit repair company to help you contact your creditors and do the necessary legwork to get back on track. Recognizing common credit repair scams will help you avoid trouble and work with a legitimate company.
Do you need assistance with your credit? Click here to apply for an Addition Financial secured credit card and start rebuilding your credit today.
