How To Spot Credit Repair Scams
When you are dealing with bad credit, the last thing you need is scammers acting as though they were legitimate credit repair companies. While there are many reputable credit repair services that can help you get your creditworthiness back on track, the amount of questionable companies in the industry has grown rapidly.
The credit repair process can help you fix your credit score by removing incorrect or unverifiable items on your credit reports from the three major bureaus (Experian, Equifax, and TransUnion).
These negative items can include the following:
- Credit inquiries
- Late payments
- Loan defaults
- Past due payments
- Public records
- Tax liens
While you can repair your credit on your own, a reputable credit repair service that has thorough knowledge of the industry can do the time-consuming legwork for you by disputing directly with the bureaus for a monthly or per-removal fee.
While there are many services in the credit repair industry that aim to scam consumers in need, there are many more that want to help. Below, we break down what you need to know in order to pick the best credit repair company for you.
What Is The CROA?
The FTC outlines a federal law known as the Credit Repair Organizations Act, which is a set of rules that credit repair organizations must follow in order to fulfill their obligations to you.
The CROA was put in place to protect consumers from deceptive advertising and business practices. It also ensures that customers in search of credit repair services are fully informed before making their decision.
The CROA defines a credit repair organization as any entity that sells and/or perform services related to improving credit or assisting a consumer with improving their credit.
This act prohibits five specific practices:
- Companies can't make false statements about a consumer's credit to the bureaus, creditors, lenders, or the consumers themselves. Additionally, they can't ask you to make false statements.
- Companies can't change your identity or ask you to do it to hide negative information. They also can't create or ask you to create an entirely new identity.
- Companies can't make false or misleading statements about their services or what you will end up with once the services are completed.
- Companies can't use fraudulent practices.
- Companies can't charge fees in advance without fully performing all services.
The CROA also ensures that full disclosure must be given to you before you sign the contract. This is a separate document from your contract and a company must receive a signed copy in order to provide services to you. They must also keep this disclosure for two years since the day it was signed.
Furthermore, the CROA outlines how a credit repair contract must be written. These guidelines include:
- The company name and physical address
- Terms and conditions about your payments, including how many are to be made
- A detailed description of the services that are provided
- An estimated completion date or length of time it takes to complete the process
- A cancellation statement noticeably printed in boldface type near where your signature will be that states "You may cancel this contract without penalty or obligation at any time before midnight of the 3rd business day after the date on which you signed the contract. See the attached notice of cancellation form for an explanation of this right."
Contracts must comply with all parts of the CROA; if not, they can't be enforced and are considered void.
The CROA forbids cancellation penalties or fees as long as you cancel before midnight of the third business day after the date you sign. You should receive a separate Notice of Cancellation from the credit repair company (they are required to keep a signed copy of the document).
The CROA doesn't allow credit repair providers to coerce you into waiving your rights.
Consumers have the right to seek damages or compensation if the credit repair company violates the law when you enroll, which include:
- Actual damages: the amount of money you are actually out of due to fees and other payments made to the company
- Punitive damages: the amount set by a court for you (as an individual or as part of a class action lawsuit)
- Attorneys' fees: this allows you to be reimbursed if you file the suit
The CROA outlines a statute of limitations of five years within the date of the violation and allows states to make any laws or regulations to protect their citizens as long as it does not conflict with the act.
What Are The Warning Signs Of A Credit Repair Scam?
Any company that does not follow the CROA should be regarded with caution. The Consumer Financial Protection Bureau outlines some important guidelines to keep in mind in order to avoid being "misled by companies offering paid credit repair services."
Some warning signs to be wary of include:
- They don't consult with you or discuss your credit history and future options with you.
- They promise to raise your credit score. While credit repair companies can tell you about the successes of past clients, they cannot make any guarantees in regards to your individual situation.
- They charge upfront fees without performing any services. You should steer clear of any company that demands payment before rendering services. If you are asked for payment before any services are performed, then steer clear. Credit repair services are not allowed to charge fees without rendering any services. However, credit repair companies may ask for a small fee to acquire your credit reports from the three bureaus.
- They say they will remove accurate information from your credit reports. Only inaccurate information can be legally removed.
- They ask you to partake in unethical tactics, such as falsely claiming identity theft.
- They suggest creating a new credit profile with a new Social Security Number or Federal Employer Identification Number.
- They don't give you a copy of the "Consumer Credit File Rights Under State and Federal Law." Credit repair companies are required by law to inform you of your right to obtain your credit reports and dispute unverifiable or inaccurate information on your own.
- They ask you to sign a form waving your CROA rights -- a practice that is actually voided by the CROA.
- They don't give you a copy of their contract before signing. Before signing any agreement, make sure that you read the contract and ensure that it contains the following:
- The name and business address of the company
- The amount you are charged
- The services being performed
- An estimated date that the services will be rendered or the time period that is required to perform the services
- A statement stating that you can cancel your contract within 3 days
What About MLMs?
Multi-Level Marketing (MLM) is a system that allows individuals to sell a product in order to earn a percentage of their sales and build their business by recruiting members called downlines. In addition to their own revenue, uplines earn a percentage of their downlines' sales.
The credit repair industry has some popular MLMs (such as Financial Education Services). These programs are completely legal -- they provide credit repair services that you do not need a certificate to perform.
We recommend that you research a credit repair service through the BBB, Trustpilot, the FTC, and your state attorney general thoroughly before signing up with them. Be on the lookout for any red flags, such as being charged upfront fees, being asked to create a new credit identity, or a guarantee of improved credit.
Take time to research a credit repair service before signing up. After all, you are entrusting your finances with someone else, so be sure they are qualified.
What Should I Do If I've Been Scammed?
If you have been a victim of a credit repair scam, there are steps you can take to try and remedy the situation:
- Report the credit repair organization to your state attorney general, which you can find through the National Association of Attorneys General website.
- Consider consulting an attorney. While this won't fix your credit, you might be able to file a lawsuit and receive compensation for what you paid the credit repair company.
- File a complaint with the Federal Trade Commission.
- File a complaint with the Better Business Bureau.
- File a complaint with the Consumer Financial Protection Bureau.
The Bottom Line
While there are many experienced and qualified credit repair companies in the industry, you should be wary of any scammers.
Looking to improve your credit and don't know where to get started? Turn to one of our reputable services to help you get started.
What are some benefits of a good credit score?
A good credit score can help you with the following:
- Renting a house or apartment (without putting down a hefty deposit)
- Your mortgage payments will be lower
- You will receive a lower down payment when you purchase a cell phone
- Your utility bills will be lower
- Your insurance premiums depend on it
- Potential employers may look at your credit history to determine reliability
- It will be easier to qualify for loans
- You will receive lower rates on loans
- You will qualify for better credit cards
What factors make up my credit score?
Your FICO® is made up of five factors:
- Payment history: 35%
- Credit utilization: 30%
- Credit age: 15%
- New credit: 15%
- Types of credit: 10%
What negative items appear on my credit report?
Your credit reports can contain both positive and negative history. Items that negatively impact your credit include:
- Credit inquiries
- Late payments
- Loan defaults
- Past due payments
- Public records
- Tax liens
How can I improve my credit?
- Consider credit repair and contact a credit repair service
- Always pay your bills on time
- Deal with past due accounts
- Reduce your credit utilization
- Keep old credit accounts open
- Open new credit (but avoid applying for too much new credit)
- Monitor your credit
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