You want to get out of debt and help build your credit so you can borrow more affordably. The problem is that not every online service may be worth your investment or time. Unfortunately, numerous credit repair scams exist, many of which can prove costly in the long run.
Some credit counselors can help you, and others make promises they cannot keep. Still, others promise to do things they cannot do for you or that you can do yourself. Here is what to know about credit repair scams and how to navigate the process.
Types of Credit Repair Scams
Credit repair scams are often growing and changing. It can be hard to know what's real and what is a costly scam. Here are several of the most common scams and what they can mean to you.
- File segregation schemes: Some credit repair companies may tell you to obtain an Employer Identification Number (EIN) from the Internal Revenue Service. These are typically reserved for businesses. They may ask you to use this new number for credit instead. However, that is not legally allowed unless you have a business.
- Pay to become an authorized user: Credit card companies allow credit card holders to add authorized users to their accounts, allowing another person to use their account. Some credit repair companies may tell you to add them as authorized users to your accounts. There is no way for this to improve your credit score.
- Credit privacy number: Credit repair companies sometimes tell you they can create a new identity for you. This would allow you to build a new credit history. This is illegal.
Signs of Credit Repair Scams
Figuring out that the service is a scam isn't always easy. Remember that these companies typically prey on those desperate for access to credit, which means they often make promises they cannot fulfill. Some of the most common warning signs that you are dealing with a credit repair scam include the following:
- They want you to pay a fee upfront before anything is done. Credit counseling services may charge a fee, but they will not make you pay upfront. The law requires that companies not charge a fee until they complete the services they tell you they will provide – this falls under the Credit Repair Organizations Act. Be careful – some companies may create a payment plan that builds in these fees to hide it from you!
- Will not tell you what they are doing but promises to fix it. If the company cannot tell you precisely what they are doing, such as disputing errors on your report, they are likely not engaged in legal service. You can dispute claims on your credit report without paying for this service. If you sign up for a credit repair service, they should provide you with a clear outline of what they will be doing.
- They promise to remove negative information from your report. If they can get that information removed, so can you. Most of the time, it simply is not possible. The key to remember here is that the only way to remove information from your credit report is if the information is inaccurate or old, which you can handle.
The Consequences of Credit Repair Scams
What happens if credit repair scams do happen to you?
- You end up paying for services you do not receive.
- You could find yourself at odds with your credit card companies, especially if the actions of the credit repair companies damage your relationship with them.
- You could face legal consequences if you violate the law while following the company's recommendations.
- Your identity could be at risk.
- You may suffer from financial loss and damage to your credit history.
How to Avoid Credit Repair Scams
You can avoid credit repair scams in many ways. First, pay attention to the warning signs for any company that makes promises to you that are not accurate. Then, make sure you stay in contact with your lenders, making timely payments. If you risk falling behind, look for an accredited financial advisor or credit counselor.
Fix your credit report problems yourself. You can get help from the three credit bureaus to do this. You don't have to file a claim with a third party – the credit bureaus make the entire process very easy to manage yourself.
Consumer Protections
The Credit Repair Organizations Act (CROA) is a U.S. federal law enacted in 1996 to protect consumers from fraudulent or deceptive practices by credit repair companies. The Act aims to ensure that credit repair organizations provide honest and transparent services to clients seeking to improve their credit scores or fix inaccuracies in their credit reports.
Key provisions of the CROA include:
- Prohibiting false or misleading claims: Credit repair organizations cannot make fraudulent or deceptive statements about their services, the possible results they can achieve, or the time it will take to see results.
- Written contracts: CROA mandates that credit repair organizations provide clients with a written agreement detailing the terms and conditions of the services offered, including any guarantees and the client's right to cancel the contract.
- Right to cancel: Consumers can cancel a contract with a credit repair organization within three days of signing without any penalties or obligations.
- Advance fee prohibition: Credit repair organizations are not allowed to charge or receive payment for their services until they fully perform the agreed-upon services.
- Disclosure requirements: The Act requires organizations to provide consumers with a clear and conspicuous disclosure statement informing them of their rights under the CROA and federal law.
Violations of the CROA can result in civil penalties, injunctions, and damages awarded to affected consumers. The Federal Trade Commission (FTC) is responsible for enforcing the CROA and ensuring compliance by credit repair organizations.
What to Do if You Become a Victim of a Credit Repair Scam
If you have been the victim of a credit repair scam, you have several steps to take:
- Contact the Federal Trade Commission to report the company and its actions. You can call 1-877-FTC-HELP to do so or contact them online.
- Contact your state attorney general for guidance on legal steps to help you. If the company has violated the Credit Repair Organizations Act or the Telemarking Sales Rule, it may be responsible for your losses.
You may want to get help with your credit in many situations. The good news is there are many nonprofit organizations, helpful online resources, and resources such as the Consumer Financial Protection Bureau that can help you without risk.