Whether it’s overrun with errors or scarred by past transgressions, your credit report needs a good cleaning. Plenty of companies promise to do that at a cost, but the credit repair industry doesn’t have the best reputation. Plus, you can do a lot of the legwork on your own for free.
Here’s how to spot scammers – and how to know when hiring reputable help may be worthwhile.
Signs of a scam
The credit repair umbrella covers a variety of services, from liaising with the bureaus on your behalf to correct errors, to negotiating debt, to performing miracle work that hardly seems possible (or legal).
“The hallmark of any scam is that the person who’s pulling off the con is looking for someone who is desperate to change their situation and is in a hurry to do it,” says Bruce McClary, vice president of public relations and external affairs at the National Foundation for Credit Counseling.
No matter how desperate you are, if you encounter any of the following, the company is not one you want to work with.
They want payment up front
Did the credit repair service ask for money before performing any services? “Run away,” says Doug Minor, credit damage consultant and expert witness.
For one thing, it’s a violation of the Credit Repair Organizations Act, signed into law in 1996 to prevent credit repair businesses from misleading customers. For another, you’ll be worse off when the company fails to follow through on its promises.
“That’s where you get the horror stories,” Minor says. “You’ll hear, ‘I paid them $2,000 and nothing happened.’ I’ve heard that story too many times. You give someone money up front, first off they’re breaking the law, and second they’re not worth the money.”
They promise to raise your credit score
Guarantees of any kind are suspect, Minor says.
“How can you guarantee the outcome of something you don’t know ahead of time? They don’t know how the creditor is going to respond, how the bureau is going to respond,” Minor says.
Dodgy credit repair operations may appear to fulfill this promise, thanks to the fact that accounts in dispute are bypassed by FICO’s scoring model while the credit bureaus investigate the dispute (which generally takes 30 days). This will cause your score to temporarily spike. It will crash later if the derogatory account is confirmed legitimate, but if pull your score during the dispute period, it will seem like the credit repair company worked some magic.
The kicker, Minor says, is that the bureaus will label the account as being in dispute – and any lender you apply to will see that label and know your score isn’t accurate. If your goal is to get a mortgage, know that Fannie Mae and the Federal Housing Administration have guidelines that prevent approvals if you have accounts in dispute.
“That’s where the consumer has to beware,” Minor says. “It might be that the credit repair company doesn’t have an understanding of those underwriting guidelines, and all they want to do is make their money. They don’t care if your desired outcome is to buy a house, and their actions are going to prohibit you from doing that.”
They promise to scrub accurate information
The reliability of the whole credit-reporting system rests on valid information being reported for the length of time dictated in the Fair Credit Reporting Act (FCRA). So, if a credit repair service says it can remove accurate but undesirable information (late payments, collection accounts, etc.) earlier, “there’s something fishy about the offer,” McClary says.
What they’re actually doing is gaming the system. According to the FCRA, information that isn’t verified with the creditor within 30 days must be removed from the report. So disreputable credit repair companies will dispute accurate information in hopes that the creditor (the bank, collector or whoever is furnishing the data) won’t respond to the bureau in time. If it doesn’t, the account will fall off temporarily. You’ll pull your report, see the account gone and think that the credit repairer has done a good job.
However, creditors report to the bureaus regularly (generally monthly). So those vanished accounts will return.
“That’s what gets a lot of people,” McClary says. “The real unpleasant surprise comes maybe a few months later, when they find those accurate accounts are showing up again, the ones they thought had been erased permanently.”
They ask you to sign away your rights
CROA requires that credit repair organizations draw up a contract that, among other things, guarantees a cancellation period. But, sometimes, in lieu of or in addition to the contract, a scammy company will ask you to sign a form waiving your CROA rights.
“That’s a huge red flag, McClary says. “They’ll come up with all kinds of phony-baloney reasons they’re asking you to do that.”
For example, they might say that, by signing the form, you’re giving them more flexibility in communicating with the credit bureaus on your behalf. This kind of paperwork won’t hold up in court, McClary points out. However, it’s better to run before it even comes to handing over your money and launching a legal battle.
They promise a clean credit slate
If a credit repair company offers you a blank slate, something illegal is afoot.
For example, the company may encourage you to start applying for new lines of credit with a different Social Security number (or they may call it a “credit privacy number”). The credit bureaus will then open a new file for this number. The process is called file segregation, and it’s illegal. But seedy companies are careful about how they describe this to customers.
“It is usually presented to the customer as a promise to completely clean their credit report of everything so they get a fresh start,” McClary says.
But it’s a “false fresh start,” McClary says, and it creates a mess later on. If you’re aware of what the company is doing, you could land in legal trouble. Plus, your old file is still floating around, attached to your real Social Security number – and your new clean file with your newest accounts is technically illegal. Fixing your file the old-fashioned way (paying off debts, gradually adding new accounts, and paying on time) is better in the long run than two useless credit files.
Are there any good apples – and should you use them?
There are times you might want to turn to a legitimate credit repair company. For example, maybe you don’t have time to dispute errors on your own.
“Some people just don’t want to deal with these things,” Minor says. “Or maybe their job is too demanding. If you can pay a couple hundred dollars to correct something and your time is worth more than that, it might be worth it to hire someone.”
Other issues that might warrant professional help include complicated errors. An account may be coded as a foreclosure, instead of as a deed in lieu of foreclosure, for example. It won’t make much difference to your score, but the code can make a huge difference in when you can get approved for a new mortgage. Having someone who knows the ins and outs of the industry and can communicate the coding error to the bureaus can probably fix the issue faster than the average consumer, Minor says.
Problem is, the credit repair industry is “so deeply infected with scams,” McClary says, that finding a reputable service can be difficult for consumers.
Minor recommends asking companies or professionals the following:
- Have you passed the Fair Credit Reporting Act certificate program from the Consumer Data Industry Association?
- Have you earned the FICO Pro certification?
“At least that’s going to tell you they’ve spent some time trying to understand FICO scores and how things impact them,” Minor says.
- Are you a member of the National Association of Credit Service Organizations?
- Is your company bonded, and does it have a business license?
“Just by asking those questions about the certifications and organizations and about the business, it’s probably going to eliminate a great deal of the undesirables,” Minor says.
When to do it yourself
Consider saving money and skipping professional help in these circumstances:
- Fixing most errors: While zapping credit report errors is a chore, it’s relatively painless for most. The bureaus have made strides in the past decade to improve the process, McClary says, noting that just this year, Equifax, Experian and TransUnion announced that they would be giving more individual attention to disputes.
“My identity was stolen years back, and it was a very frustrating time-consuming process,” McClary says. “A lot of people are going to be relieved that the process is now more streamlined. And it’s something the consumer can do themselves instead of shelling out money to someone.”
- Removing one-time late payments: For whatever reason, you paid late. It’s out of character for you, and you don’t want a late payment notation camping out on your report for seven years.
“Maybe you were just on vacation or the proverbial dog at your payment,” Minor says. “It happens to the best of us, and it’s happened to me.”
Rather than running to a professional with your checkbook open, call your creditor, Minor suggests. If your history is otherwise clean, they might agree not to report the late payment (if they haven’t already). If they’ve already reported it, they might agree to stop reporting it to the bureaus as a courtesy.
“The right thing to do is to make the call and see what you can get,” Minor says. “Hopefully they’ll be empathetic and accommodate you.”
- Fixing a long history of bad credit: If you’re looking to get rid of charged off accounts and years of late payments, a credit repair company is not the answer. There’s no way but the hard way in this situation. McClary recommends becoming versed in what affects your credit score (some credit counseling agencies offer programs and online resources, as does the NFCC).
“The best way to repair a credit file is through a lot of hard work and a lot of time,” McClary says. “You’re going through a restoration period where you’re opening new lines of credit, making on-time payments, keeping balances low while you’re trying to resolve the balances on those old, past-due accounts. Over time, you will see an improvement.”