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How do credit repair agencies work?
11.12.08
By John Ulzheimer
This week we're going to explore the dubious world of credit repair. I'm sure some of you are thinking, "John, why in the world are you spending time talking about credit repair?" The answer is simple. Credit repair agencies are a reality and credit repair is perfectly legal (except in Georgia) if the companies follow the Federal and State laws governing the process. They are advertising on the Internet, radio, in newspapers and even on infomercials. They are spending millions of dollars trying to get your attention.
It's in your best interest to become more educated about credit repair agencies and their processes. In my travels I've bumped elbows more than once with the credit repair guys and girls. Some of them seem like decent people while others are one step up from pond scum.
Most credit repair companies offer a subscription service whereby you pay a fee every month either through direct draft of a checking account or credit card. Their fees range from as low as $39 per month to over $100 per month. And while it's hard to get them to fully disclose what they do for their fees, you'll have no such trouble from me. Here's how credit repair agencies work...
- As you sign up for their services you'll be asked to give them power of attorney. You'll find out why later.
- The credit repair company will need to get their hands on your credit reports — all of them. They may ask you to get them or they may get them on their own with access to the credit reporting agency databases.
- Once they have your three credit reports they'll identify anything that is commonly considered to be negative by lenders and credit scoring models.
- Once they've identified these items they'll write dispute letters on your behalf to each credit bureau challenging the validity of these items. They'll sign your name, which is where the power of attorney comes in handy.
- The credit bureaus have no choice but to respond to these disputes and perform their so-called investigations. This investigation is nothing more than the bureaus verifying what the lender sent them is really what they want to show up on the consumer's credit report. There is no Austin Powers like character investigating anything — a fact the credit bureaus don't want you to know.
- After the bureaus have completed their, ah-hem, investigation they will update any changes to the credit reports and send updated copies to the consumer. If they have been unable to verify the information they have to remove it.
- Many credit repair companies will ask you to send them the responses from the credit bureaus. This allows them to track what has been removed and what still remains. This allows them to generate another set of dispute letters challenging the remaining negative items.
- If they were to simply resubmit the same dispute a second time, the bureaus can legally ignore it as being frivolous. So, the credit repair companies, the smart ones anyway, will slightly modify the dispute so it can't be considered the same. For example "No, I meant I was never late, not that it isn't mine."
This process continues as long as the consumer chooses to pay for the services or as long as there is negative information on their credit reports. Think the process is a joke? Think again. It's amazingly effective, which is why these services are becoming more popular.
This Thursday I'm going to publish an interview I recently did with a credit repair company.
If you have any questions or comments about credit repair agencies then please feel free to contact me at askjohn@credit.com.
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