Credit repair scam: An overview
The credit score is a crucial factor that affects our financial life, impacting our ability to rent a home or obtain a loan with a favorable interest rate. A single missed payment on a loan or credit card can reflect negatively on our credit report, resulting in a lower credit score, making it challenging and more expensive to obtain a new loan. In some cases, lenders may even reject loan applications altogether.
Credit repair services can be helpful if your credit score is low and you need to improve it quickly. However, many people turn to credit repair companies for immediate assistance. These companies promise to improve credit scores and help clients repair their credit. They dispute negative information on credit reports to increase credit scores if the negative information is changed or removed.
Throughout the years, the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) have filed numerous complaints and taken action against credit repair companies that engage in illegal and deceitful practices. Some companies advise clients to break the law or utilize their information to make fraudulent identity theft or police reports. While improving your credit is crucial, avoiding hiring a company that could potentially cause further harm is essential.
While searching for a legitimate credit repair company to help boost your credit score, you must be aware of such credit repair scams that make exaggerated promises and can be costly. Unfortunately, some credit repair companies still exploit vulnerable individuals and scam them out of their money. Awareness of these scams is crucial to ensure you are not being a victim. However, there are also legitimate credit repair companies that can genuinely help consumers. Knowing the difference between genuine credit repair services and credit repair scams is vital.
How to scam credit repair companies work
A reputable company may find mistakes that you overlook and may be able to have inaccurate negative information taken out of your credit report due to limitations in the reporting or dispute procedure. Several companies also give their clients information on how credit works and how to build credit on your own.
However, other credit repair companies are blatant scams that crooks put up to take your money. Credit repair scams involve promises they can't keep or employ methods that could cost you money in the long run. The methods used by credit repair businesses can take advantage of legal gaps or include illegal or unethical behavior.
Here’s how credit repair scams work:
They guarantee positive results within a stipulated time
Even credit repair companies with the greatest intentions shouldn't overstate or guarantee results, such as a specified score improvement or a point gain in a specific number of days. As a consumer, you should avoid guarantees, and if a company promises to fix an error in 15 or 30 days, you should question how this is being accomplished.
Some companies promise a refund, but this differs from promising a rapid increase in credit scores. In general, you should be wary of any business that makes promises of being able to complete tasks quickly.
They will suggest illegal ways to improve your credit score
To prove that your accounts with wrong information were opened fraudulently, scam credit repair agencies may insist you submit a police or identity theft report in your name. Although it is prohibited, filing fraudulent police or identity theft reports to provide credit repair service may occasionally be successful.
Even if the strategy raises your credit score, it can backfire if the scam is discovered by the three credit bureaus. As a result of the approach by the scam credit repair organizations, when you apply for a new credit card or any other line of credit, lenders may become suspicious of you, regardless of your credit score. This might make it harder for you to qualify for new credit.
Also, you shouldn't be forced into fabricating your credit history for the sake of credit repair. Contact the credit reporting agencies in every way and dispute something if you believe it to be legitimately incorrect. Yet, if something is entirely factual, you probably shouldn't challenge it as wrong.
They might ask you to set up a Credit Privacy Number (CPN) or EIN
Several credit repair companies claim that you may start building your credit score from scratch by establishing credit not linked to your Social Security number. They might try to sell you an employee identification number (EIN) or credit privacy number (CPN) (EIN) and advise you to use that for credit building.
The CPN is often someone else's SSN, which is something the scam company is not disclosing to you. These people don't frequently check or utilize their credit, so most of these numbers typically belong to children, the elderly, or those now resting in peace.
You might not be aware of it, but using a CPN may constitute a serious criminal offense, and you risk going to jail. Using an EIN to establish credit is not against the law if you are using it to establish corporate credit for a business. But doing so in place of your SSN while applying for personal credit could be against the law.
You pay a fee but don’t get any services in return
The most common credit repair scam occurs when companies take clients' money without providing any services in return. Even legitimate credit repair companies are prohibited from charging fees for services they have not yet rendered, as stipulated by the Credit Repair Organizations Act (CROA). The Federal Trade Commission enforces the CROA, which forbids credit repair organizations from demanding advance payment for their services. Furthermore, the CROA requires credit repair contracts to be in writing and grants consumers specific rights to cancel their contracts.
The following are the main requirements of CROA:
- Credit repair organizations (CROs) are prohibited from charging upfront fees and can only receive compensation after providing services.
- CROs are also prohibited from charging excessive set-up fees.
- CROs are not permitted to make false or misleading statements to credit reporting agencies.
- CROs cannot advise consumers to make false statements to alter their identity for better credit.
- CROs must have a written contract with their clients that includes specific disclosures
- The agreement must also have a written and signed right to cancel.
If any credit repair companies are found to violate the Credit Repair Organizations Act, it's vital to file a complaint within five years of the violation date. Failure to comply with the CROA could result in significant consequences, as courts cannot reimburse punitive damages, as outlined in 15 U.S.C. § 1679g. The prevailing party in any lawsuit for a CROA violation is entitled to attorney fees, and class action relief is an option. Moreover, credit repair organizations are subject to administrative enforcement under the FTC Act.
What are the types of credit repair scams
Tradeline renting, credit privacy numbers and file segregation schemes are a few of the most prevalent credit repair scams. If you participate in one of these unlawful con games, you might be charged with a criminal offense; and get behind bars or pay penalty charges.
Some scam credit repair agencies would urge you to pay to become an authorized user on a stranger's account. An unreliable credit repair agency will guarantee that this action will raise your credit score, but you have no idea how negatively it will affect your credit in the long run.
Credit privacy number
In addition to making inflated claims, certain credit repair agencies may claim they can create a new identity for you to hide your bad credit history. Claiming or performing such action is prohibited, according to the FTC. Some credit repair services may offer you a CPN, a credit profile number, or a credit privacy number, a nine-digit number similar to your Social Security number.
File segregation scheme
Scam credit repair agencies may provoke you to get an Employer Identification Number (EIN) from the Internal Revenue Service through an application. The credit repair agencies may ask you to use the new number to submit a credit application. This practice is illegal as EINs are legal identifiers for businesses to get business credit.
Credit by phone
Another credit repair scam involves advertising guaranteed credit or cash loans, supposedly available with just a $50 phone call. However, the caller is often given a list of banks offering low-interest credit cards or a brochure on establishing credit without receiving the promised loans or credit.
What are the signs of credit repair scams?
Credit repair scams can be avoided if you identify the red flags. According to the Consumer Financial Protection Bureau (CFPB), these are indications of credit repair scams.
Pay attention if any credit repair organization doing the following:
1. Demands upfront payment of fees
Before doing any work, credit repair companies might want payment in advance for their services. According to the federal Credit Repair Organizations Act, companies that self-identify as "best credit repair companies" cannot be paid fees until all services have been rendered.
A credit repair company cannot be paid until at least six months. According to the Telemarketing Sales Regulation, you must also receive credit reports from the major credit bureaus, proving that it delivered on its promise to repair credit if you communicated over the phone.
Many credit repair companies might try to get you to sign up for a monthly payment plan to avoid this rule, but doing so is also prohibited.
2. Avoid informing your rights under the law
Some credit repair companies might avoid informing you that you can dispute inaccurate information on your credit report for nothing. Also, they may not notify you that you can cancel your agreement with a credit repair service within three business days of signing it, free of charge and for any reason.
3. Requests that you refrain from contacting the credit bureaus
They don't want your involvement with the credit bureaus. They know you can remove negative information from your credit report without their assistance. Why do you hire them if you can do it all by yourself?
They fear you'll stop giving them your hard-earned money once you realize you've been exploited. So, this is a huge warning sign if a company requests that you refrain from directly contacting the credit bureau (Equifax, Experian, or TransUnion).
4. Suggests that it can dispute genuine negative information
You can be promised by a scam credit repair company that it can successfully dispute every negative item on your credit report, even if it's genuine. This is not possible. A credit repair organization is committing fraud if it states that it can delete accurate and inaccurate information from credit reports.
5. Offers to create a new credit identity
One of the most significant warning signs of a credit repair scam is if someone offers to create a new identity for you. This is illegal and can have serious consequences, such as identity theft and fraud. It's essential to be aware that no legitimate credit repair company will ever offer to create a new identity for you - this should always be a significant red flag.
Shaun Connell, Founder, Writing Tips Institute confirmed that this scam could damage your score and make obtaining loans or other forms of credit more difficult. To protect yourself, always be sure to do your research before working with any company that offers to repair your credit. Verify the company's legitimacy, read reviews, and ensure that they follow the outline provided by federal law.
6. Requests that you dispute the accuracy of the information in your credit reports
A credit repair agency may suggest that you dispute accurate but negative information on your credit report and promise to have negative items removed. Reviewing your credit report and disputing inaccurate information to improve your score is a good idea. But, you should not challenge accurate entries at any cost.
7. Claim to remove a bankruptcy filing
Companies who claim they can remove a bankruptcy filing from your credit report are lying to you. You cannot remove a valid entry from your credit report. Filing bankruptcy is a valid entry that you caused by filing bankruptcy. The bankruptcy will be removed from your credit report ten years after you file a Chapter 7 and 7 years after you file a Chapter 13, no sooner.
Peter Mullison, Attorney, Colorado Bankruptcy Law Group, LLC, stated that the only way a credit repair company can remove a bankruptcy from your credit report is if it wasn't you who filed. Besides, most people will see a dramatic improvement in their credit score after they file for bankruptcy. Most people will see a score in the mid-600s within a year of filing Chapter 7 without doing anything. Don't waste your money hiring a credit repair company. Anything they claim to be able to do, you can do yourself for free.
What questions should you ask before signing up for a credit repair service?
To verify suspicious credit repair companies, you must ask the following questions:
|Questions to ask||Probable answers you should expect|
|1. Who is the owner of the credit repair company?||Before you sign up for the credit repair service, you must know every detail about the company and the owners.|
|2. Do you have any credible accreditations?||It would be better if the company had accreditation from the National Association of Credit Services Organizations (NACSO) or the Better Business Bureau (BBB).|
|3. What is the percentage of clients you reject?||A reputable and efficient company in the credit repair industry doesn’t offer services to everyone. So, you may avoid contacting a company that claims to help everyone. Credit repair service doesn’t apply to every individual.|
|4. How will you assist me in achieving the desired outcome and protect my credit identity?||If the company claims they can positively assist you with your poor credit or remove every negative item in your credit report, through their credit repair process, that’s your red signal.|
|5. What action will you take if you discover an error in my credit report?||You must be informed whether they’ll contact the bureaus (Equifax, Experian, and TransUnion) or will directly communicate with the creditors to dispute the errors.|
|6. How much will the credit repair cost?||Typically, in the credit repair industry, most companies may levy monthly fees, setup fee, or charge per negative item removed. Although an exact credit repair cost or assurance cannot be provided, most companies will estimate the fees and inform you of the cost if they successfully remove a specific number of negative marks.|
|7. Could you provide me with a copy of your contract?||As per the Credit Repair Organizations Act, credit repair companies must have a written contract outlining the terms and conditions of payment and a comprehensive explanation of the work they will do.|
How to find a trustworthy and reputable agency to repair credit?
Some companies specialize in credit counseling and are dedicated to helping you reconstruct your credit and achieve your financial goals. Companies typically provide credit repair services with local offices, online portals, or phone-based services.
Each agency has its own monthly fee structure, usually involving bundled services and a monthly charge. The fees vary between $20 and $150 monthly, depending on the selected services. Additional costs may include a setup fee or enrollment fee, and cancellation charges. A few of the companies may also offer a money back guarantee.
It may take several months for the agency to deliver results. Generally, it takes around six months or more to repair your credit completely. If you have bankruptcy on your record, it could take up to 10 years to be removed from your credit history.
Corrected errors may resurface on your credit report for various reasons, and you should regularly review your credit reports to ensure they remain accurate. You can challenge any erroneous information that reappears on your report.
How to protect yourself from credit repair scams
Here are some tips to avoid being scammed by a credit repair company:
- Follow the guidelines established by the federal Credit Repair Organizations Act to understand your rights regarding credit repair.
- To dispute inaccurate information, make direct contact with the credit bureaus.
- Go to AnnualCreditReport.com and get free copies of your credit reports from the three major credit bureaus and start DIY credit monitoring.
- Improving your credit record requires time, effort, and a personalized plan to pay off your debts. There is no simple, quick fix for poor credit.
- Instead of seeking assistance from a credit repair company, consider contacting the nonprofit National Foundation for Credit Counseling online or at 800-388-2227 and find a trustworthy credit counselor. Before signing up with the credit counseling agencies for the credit counseling service, check online reviews.
- Get expert advice from the CFPB on credit repair and how to improve your credit.
- Avoid enlisting the services of a credit repair agency that demands payment before commencing credit repair service on your case.
- Do not trust credit repair companies that are vague about their methods or claim that they alone can resolve your credit issues by offering legitimate credit repair services.
- Do not follow instructions from credit repair companies to falsify a credit or loan application. It is a criminal offense that may result in fines or imprisonment.
- Do not take advice to apply to the IRS for an Employer Identification Number to use in place of your Social Security number when applying for credit. Obtaining an EIN through false pretenses is illegal.
Under the Fair Credit Reporting Act (FCRA), you are entitled to be informed if any information in your credit report is utilized to deny your credit, employment, or insurance application. Moreover, the Fair Credit Reporting Act allows you to demand and access all the data that a consumer reporting agency possesses regarding you, known as "file disclosure". The Fair Credit Reporting Act applies to all credit reporting companies that amass and sell your information to third parties. These companies must abide by the regulations of the FCRA. Equifax, TransUnion, and Experian are the most well-known three credit reporting agencies in the United States.
Removing errors or negative items won’t work if you’re struggling with huge debts. Some alternatives you may consider:
- Maintaining healthy financial habits and building good credit.
- Debt consolidation.
- Debt settlement.
- Filing for bankruptcy.
If you believe you have fallen for a scam, there are a few ways to report credit repair fraud:
- The Federal Trade Commission, online or at 877-382-4357
- The Consumer Financial Protection Bureau (CFPB)
- The state attorney general’s office