“Credit problems? No problem!”
“We can erase your bad credit — 100% guaranteed.”
“Create a new credit identity — legally.”
“We can remove bankruptcies, judgments, liens, and bad loans from your credit file forever!”
Does all this sound too good to be true? Well, it is. These are the typical claims of shady credit repair organizations (CROs) which often victimize unwary consumers – usually, the most vulnerable consumers who are struggling with bankruptcy or have had problems rebuilding damaged credit reports and credit scores. These companies promise, for a fee, to clean up your credit report so you can get a car loan, a home mortgage, insurance, or even a job.
Generally, they can’t deliver. After you pay them hundreds or even thousands of dollars in fees, these companies do nothing to improve your credit report – most simply vanish with your money. Rather than improving your credit, you may end up deeper in debt and see your credit score actually get worse.
As opposed to credit counselors, who provide guidance on improving your credit reports and scores through better financial management, these credit repair organizations offer to remove negative information from your credit report. Generally, there are three steps to the service that these credit repair organizations offer: 1) The companies ask you to forward them copies of your credit reports (usually from the three major credit reporting agencies – Equifax, Experian, and TransUnion), which you must obtain directly from those agencies; 2) The credit repair organizations then recommend which items on your credit report you should dispute; 3) The credit repair organizations then contact the credit reporting agencies to challenge questionable items on your credit reports.
However, the simple truth is that no one can legally remove accurate negative information from a credit report. Credit reporting agencies are obligated under the Fair Credit Reporting Act (FCRA) to correct or delete inaccurate, incomplete, or unverifiable information, usually within 30 days. They are not required to remove accurate information unless it is more than seven years old (or bankruptcies that are over ten years old).
You have the right to dispute any inaccurate or incomplete information on your credit report – and the credit reporting agency must investigate the dispute without charge to you. Everything a credit repair organization can do for you legally, you can do for yourself at little or no cost.
Shady credit repair organizations have long been the target of investigation by the Federal Trade Commission (FTC) due to the high numbers of complaints from consumers. Last year, the FTC launched ‘Project Credit Despair’ which has snared 20 ‘Credit Repair’ scammers to date.
A number of class-action suits have also been filed against credit repair organizations. Equifax and Fair Isaac face a class-action suit in Georgia for selling the ‘Score Power’ program designed to help consumers predict their credit score and see how changes to their credit reports affect that score. While this is may not actually be a credit repair service, the plaintiffs are attempting to use the law that regulates credit repair organizations to sue the companies. Fair Isaac is also facing another class-action suit in California based upon similar complaints.
How Can You Avoid Becoming a Victim of These Scams?
The obvious answer is to save yourself the money and the risk by improving your credit on your own. There are also numerous non-profit credit counseling organizations which can help you to devise a plan for managing your finances and improving your credit. The National Foundation for Credit Counseling (NFCC) is a nonprofit credit counseling network which can refer you to a member in your area.
However, if you don’t feel you have the time to do this on your own, if you are are overwhelmed by the process, or if you just want to turn the whole thing over to professionals, there are some basic rules for picking a reputable company to assist you in repairing your credit.
According to the FTC, the main warning signs of scam credit repair companies are:
Companies that want you to pay for credit repair services before they provide any services. Credit repair companies cannot require you to pay until they have completed the services they have promised.
Companies that do not tell you your legal rights and what you can do for yourself for free.
Companies that recommend that you not contact a credit reporting company directly.
Companies that suggest that you try to invent a “new” credit identity — and then, a new credit report — by applying for an Employer Identification Number to use instead of your Social Security number.
Companies that advise you to dispute accurate information in your credit report or take any action that seems illegal, like creating a new credit identity. If you follow illegal advice and commit fraud, you may be subject to prosecution.
In 1996, the Credit Repair Organizations Act (CROA) was signed into law to protect the public from unfair or deceptive advertising and business practices by credit repair organizations. By law, credit repair organizations must give you a copy of the “Consumer Credit File Rights Under State and Federal Law ” before you sign a contract. They also must give you a written contract that spells out your rights and obligations. Read these documents before you sign anything.
The law contains specific protections for you. For example, a credit repair company cannot:
Make false claims about their services.
Charge you until they have completed the promised services.
Perform any services until they have your signature on a written contract and have completed a three-day waiting period. During this time, you can cancel the contract without paying any fees.
Your contract must specify:
The payment terms for services, including their total cost.
A detailed description of the services to be performed.
How long it will take to achieve the results.
Any guarantees they offer.
The company’s name and business address.
A Fresh Start?
A common, and illegal, tactic employed by scam credit repair organizations is called ‘file segregation.’ These companies have flooded the mail, internet, radio, and TV with ads claiming that using ‘legal forms from the federal government’ you can exercise your ‘one-time right’ to apply for a new Social Security number.
Bingo, you’re a new person with a clean credit history, right? Wrong – unlike other scams in which you may be an innocent victim, this scam makes you a perpetrator of fraud against the government. If you try ‘file segregation’, you could face fines or even a prison sentence.
File segregation operators advise the consumer to apply to the IRS for an Employer Identification Number (“EIN”). Consumers are told to use the EIN in lieu of their Social Security number when applying for credit, in order to create a completely new credit file in which the old debts will not appear. The scheme essentially involves an attempt to hide one’s identity from creditors by getting credit with the EIN and a name and address that differ slightly from accurate identifiers.
Both the person selling such a scheme and consumers who follow the scheme are violating the law. The CROA bars any person from making or counseling any consumer to make any untrue or misleading statement with the intent to alter the consumer’s identification in order to hide accurate credit information. Consumers following such advice may be committing felonies.
Several aspects of a credit repair service’s program could lead you to commit fraud. It is a federal crime to:
Make false statements on a loan or credit application.
Misrepresent your Social Security number.
Obtain an EIN under false pretences.
In addition, if you were to use the telephone or the postal system to apply for credit and provide false information, then you could be charged with mail or wire fraud, too. Also, file segregation likely would constitute civil fraud in many states.
Have you already been victimized by one of these shady credit repair organizations? If so, you have the right to sue the credit repair organization under the CROA. They could be liable to you for the damages you suffered or the amount you paid to them, whichever is greater. The credit repair organization is also liable for attorney’s fees and punitive damages if the violation was particularly egregious.
If you’ve been taken advantage of by a credit repair organization, contact the FTC. You can file a complaint at www.ftc.gov or by calling 1-877-FTC-HELP. The FTC can also start administrative proceedings against the credit repair organization and individual states can sue the organizations to stop them from violating the Act and to recover damages suffered by residents.
Law Firms Offering Credit Repair
There are a number of law firms which have moved into the credit repair market, such as Lexington Law and Ovation Law. What difference does it make to have a law firm working on your credit repair? Not much. They go through the same process and do the same thing as the non-law firm credit repair organizations.
These firms are still covered by the Credit Repair Organizations Act, and are bound by state bar association rules. However, the difference is that most states require non-law firm credit repair organizations to place a bond with the state as a guarantee that they will comply with local laws regarding credit repair. Law firms are generally exempt from this requirement, and this has led a number of credit repair organizations to convert to law firms. Most of these law firms don’t really practice law…they’re just firms on paper.
*Consumer Credit File Rights Under State and Federal Law
You have a right to dispute inaccurate information in your credit report by contacting the credit bureau directly. However, neither you nor any ”credit repair” company or credit repair organization has the right to have accurate, current, and verifiable information removed from your credit report. The credit bureau must remove accurate, negative information from your report only if it is over 7 years old. Bankruptcy information can be reported for 10 years.
You have a right to obtain a copy of your credit report from a credit bureau. You may be charged a reasonable fee. There is no fee, however, if you have been turned down for credit, employment, insurance, or a rental dwelling because of information in your credit report within the preceding 60 days. The credit bureau must provide someone to help you interpret the information in your credit file. You are entitled to receive a free copy of your credit report if you are unemployed and intend to apply for employment in the next 60 days, if you are a recipient of public welfare assistance, or if you have reason to believe that there is inaccurate information in your credit report due to fraud.
You have a right to sue a credit repair organization that violates the Credit Repair Organization Act. This law prohibits deceptive practices by credit repair organizations.
You have the right to cancel your contract with any credit repair organization for any reason within 3 business days from the date you signed it.
Credit bureaus are required to follow reasonable procedures to ensure that the information they report is accurate. However, mistakes may occur.
You may, on your own, notify a credit bureau in writing that you dispute the accuracy of information in your credit file. The credit bureau must then reinvestigate and modify or remove inaccurate or incomplete information. The credit bureau may not charge any fee for this service. Any pertinent information and copies of all documents you have concerning an error should be given to the credit bureau.
If the credit bureau’s reinvestigation does not resolve the dispute to your satisfaction, you may send a brief statement to the credit bureau, to be kept in your file, explaining why you think the record is inaccurate. The credit bureau must include a summary of your statement about disputed information with any report it issues about you.
The Federal Trade Commission regulates credit bureaus and credit repair organizations. For more information contact:
The Public Reference Branch
Federal Trade Commission
Washington, D.C. 20580
Find Out Where You Stand
You can check your credit score each month using Credit.com’s free Credit Report Card. This completely free tool will break down your credit score into sections and give you a grade for each. You’ll see, for example, how your payment history, debt and other factors affect your score, and you’ll get recommendations for steps you may want to consider to address problems. In addition, you’ll also find credit offers from lenders who may be willing to offer you credit. Checking your own credit reports and scores does not affect your credit score in any way.