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Are Credit Repair Companies a Scam?

The Motley Fool logo The Motley Fool 3/3/2019 Christy Bieber

Should you turn to a credit repair company for help? Read this before you decide.

a close up of a sign: Yellow signs labeled "Scam Alert" © Provided by The Motley Fool, Inc Yellow signs labeled "Scam Alert" Image source: Getty Images

Having good credit is really important, so it can be really frustrating when your credit score is lower than you’d like. So frustrating, in fact, that turning to a credit repair company may seem like a great idea.

Credit repair companies typically make you lots of promises that sound really appealing. You can pay just a small fee, they’ll say, and you’ll get a brand new credit identity or will be able to make negatives on your credit report disappear.

The only problem is, most of these promises are nothing more than empty words. Many companies will just take your money and do nothing for you or, worse, will encourage you to engage in high-risk behavior such as committing fraud by lying on loan applications.

To make sure you don’t fall victim to a credit repair scam, it’s essential you understand the signs that a credit repair company isn’t legit. You also need to know your rights as a consumer, because there are laws in place designed to protect you from unscrupulous people and businesses that prey on your desperation for a good credit score.

Your rights as a consumer using a credit repair company

The Credit Repair Organization Act (CROA) prohibits credit repair companies from making dishonest promises. Credit card companies also can’t collect any money from you until they have performed their services, and they must explain certain things upfront before collecting any fees. Credit repair companies are required to:

  • Provide a written contract detailing the services they’ll perform for you and your rights as a consumer.
  • Inform you that you have three days to cancel at no charge from the time you first sign up for service.
  • Explain how long it will take for their service to actually make an impact on your credit.
  • Explain, in detail, any guarantees that they make to customers.

This Act is enforced by the Federal Trade Commission. If you’re considering working with a credit repair company and they don’t fulfill these requirements, they aren’t a good company to do business with since they’re violating federal law.

How can you tell if a credit repair company is a scam?

A credit repair company that doesn’t provide you with a written contract is likely not a legitimate one. But there are other signs of a scam you should look out for as well. According to the Federal Trade Commission, some of the other potential red flags that suggest a credit repair company isn’t legitimate include:

  • Companies that try to collect an upfront fee before performing any work for you.
  • Companies that urge you not to check your own credit or not to reach out directly to credit reporting agencies.
  • Companies that urge you to file disputes with credit reporting agencies about negative information on your credit report even when that information is accurate.
  • Companies that urge you to provide inaccurate information on applications for credit cards or loans.
  • Companies that promise you can develop a “new credit identity,” usually by applying for an Employer ID Number (EIN) you can use on loan applications instead of your Social Security number.

When you’re looking for a credit repair company, often this old adage is advice to remember: If it sounds too good to be true, it probably is.

What happens if you get caught up in a credit repair scam?

If you end up the target of a scammer, you could lose money you pay to the credit repair company. Depending upon what actions, if any, the credit repair company takes on your behalf, you could end up making your credit worse -- or at least will lose time that you could’ve spent actually improving your credit.

In a worst-case scenario, you could get into legal trouble by following the advice of credit repair companies. It’s a crime to apply for an EIN under false pretenses. It’s also a crime to lie on loan applications or to misrepresent your Social Security number. While it’s not very likely you’d be prosecuted, there is still a chance you could face criminal charges if you break the law on the advice of an unscrupulous company.

Unfortunately, your options for recovering your lost funds paid to a scam credit repair company are limited. You could file a lawsuit and seek compensation for actual damages plus punitive damages -- but it can cost money to hire a lawyer and there’s no guarantee you’ll win. You could also join a class action if a lawsuit is filed to get justice for many people caught up in the same scam. While joining a class action doesn’t cost you money or require you to hire a lawyer personally, the compensation you’d get is usually limited.

You don’t need to hire a credit repair company

Since so many credit repair companies are a scam, you may be wondering if you should try to hire one at all. Generally, the answer is no.

The reality is, you’re the only one who can repair your credit, and doing so is going to take time. You can repair your credit by:

  • Establishing a positive payment history. Payment history is the most important component of your score. If you can develop a record of paying on time, your credit score will improve -- and past late payments won’t matter so much any more. If no one will give you a credit card or loan so you can prove you’ll pay it on time, get a secured credit card, charge a small amount each month, and pay it back as soon as you get your credit card statement.
  • Paying off debt. Reducing what you owe will improve your credit utilization ratio, which is the amount of available credit you’ve used relative to the amount of credit available to you. Keeping your utilization rate as low as you can is ideal -- but you definitely want to get that ratio below 30% because ratios above this threshold will hurt your credit score.
  • Avoiding opening too much new credit at once. While it’s good to have a mix of different kinds of credit, you don’t want to apply for a bunch of credit cards or loans all at once. Opening new credit results in an inquiry on your credit report, and too many inquiries damage your score. Plus, each new account lowers the average age of your credit, and an older age of credit helps you earn a better score.

These are the only ways to actually improve your credit score legitimately. You don’t need a credit repair company to help you do any of these things.

Don’t fall for credit repair scams

If you make a commitment to improve your credit through developing responsible borrowing behaviors, there will be no reason for you to hire a credit repair company. This is the best and safest way to avoid falling victim to a scam -- and you’ll save a lot of money you’d otherwise have paid to a company that can’t really provide much help.

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