How to Avoid Credit Repair and Credit Counseling Scams
There are a lot of credit repair and credit counseling companies in the U.S. and for good reason. With household debt soaring to record highs and about 800,000 Americans filing for bankruptcy each year, people are constantly reaching out for the Financial Mr. Fix-It, someone that can transform their shrinking dollars into sense.
There’s no shortage of companies that claim to have those answers. Unfortunately, as is the case for most cottage industries, there are some unwelcome byproducts: Credit repair scams, credit counseling scams and people worse off financially than they already were.
Signs of a Credit Repair Scam
There are several obvious red flags to watch for before going with a credit repair company:
- The company requests a payment before any credit repair services are provided.
- Consumers are not informed about their legal rights or actions they can do themselves for free.
- Consumers are told not to directly contact a credit bureau.
- The company tells the consumer to invent a “new’’ credit report by applying for an Employer Identification Number instead of using their Social Security Number.
- Recommendations include actions that seem illegal, such as creating a new credit identity, or ill-advised, such as disputing all information in the credit report.
Remember: If a consumer follows illegal advice and commits fraud, they could be subject to prosecution.
Consumers should realize that do-it-yourself credit repair can be effective — and free. Anyone could save more than $1,000 a year by knowing how to read a credit report, create a budget and execute their own action plan.
But you won’t hear that in the sales pitch offered by the nation’s voluminous array of credit repair companies. They sometimes give misleading or inaccurate information about their services. It can sound awfully seductive when a credit-shaky consumer is promised (for a fee) to have their record cleaned up so they can secure a car loan, home mortgage, insurance or a job.
However, once the up-front fees are collected, sometimes nothing is done to improve the credit. The company could even vanish — while the bad credit still lingers.
It might sound like many precautions are in order, but it’s true. Consumers with poor credit are targeted, often bombarded with phone calls, e-mails and letters from companies that promise to improve their financial fortunes. It’s an attractive pitch, but there are scammers.
There are too many occasions when a consumer’s credit never changes, even while paying fees to a company that does not back its claims.
You should know about the Credit Repair Organization Act, enforced by the Federal Trade Commission, which makes it illegal for credit repair companies to misrepresent their services and to charge you before any services are completed.
Know Your Rights When Working with Credit Repair Companies
- Your legal rights in a written contact that explains the services the company will perform.
- A three-day right to cancel with no charge.
- An estimate of the time frame to get results.
- Your total cost and an explanation of any guarantees.
It’s also useful to remember that credit repair companies can’t get accurate information removed from your credit report, even if it’s negative. If the information on your credit report is inaccurate, consumers can get it removed themselves.
Signs of a Credit Counseling Scam
Similar precaution should be used with credit counseling agencies.
- Beware of for-profit credit counseling agencies posing as non-profits. Make sure the agency you are considering is a member of the National Foundation for Credit Counseling, the leading non-profit trade association.
- Don’t work with a company that charges high fees: for example, a set-up fee north of $100 or fees based on a percent of your debt balances.
- Check the credit counseling company’s Better Business Bureau profile. What is their rating? How many complaints do they have and do they respond to their complaints?
- Nonprofit credit counseling companies are required to provide financial education to their clients. Ask questions about what kind of financial education the agency provides and how it is distributed.
- Beware of promises that sound too good to be true. There’s no quick and easy way to get out of debt.
As a general rule, nonprofit credit counseling organizations are your best choice when seeking credit repair advice.
There are also nonprofit credit counseling and debt management programs available. Trained counselors can examine your situation and develop a strategy tailored specifically for your financial needs. It requires time, a solid plan and consistent effort to improve your credit worthiness.
Consumers should also confirm their payments with creditors. Some credit counseling companies require a lump-sum check that gets divided between the creditors. It’s always wise to make certain the proper payments are being made in the agreed-upon amount.
Use Common Sense to Avoid Scams
In any circumstance, common-sense rules and instincts are the best barometer. Don’t believe promises that sound too good to be true such as anyone claiming to “get you out of debt easily.’ Avoid up-front fees. The initial consultation should always be free. Reputable firms should provide counseling and education — along with debt consolidation and payment services — so consumers can achieve financial stability to remain debt-free. The consumer should leave with better knowledge of how to manage finances, along with setting up a personal, household spending budget.
As usual, it amounts to dollars and (common) sense. An informed consumer is an empowered individual. In this modern atmosphere of scams in the credit repair and credit counseling fields, solid knowledge is a good thing.
If you have been scammed, report the company to the Consumer Financial Protection Bureau.
What is the Consumer Financial Protection Bureau?
Congress created the Consumer Financial Protection Bureau (CFPB) in 2010 as a federal agency under the Dodd-Frank Act. The CFPB monitors consumer finance products and sets rules. It also offers counseling to consumers, including information on credit-related issues.
The CFPB attempts to stop practices that take advantage of consumers by enforcing consumer protection statutes and helping borrowers become better money managers. Though the agency isn’t a credit counselor per se, it offers a number of the services associated with credit counseling.
If you’re having problems with credit, the CFPB website is a good place to visit as you begin your research.
- NA, (2016), Avoiding Credit Repair and Credit Counseling Scams. Retrieved from: http://bankruptcy.findlaw.com/debt-relief/avoiding-credit-repair-and-credit-counseling-scams.html
- NA, (2014, 27 July), Credit Counseling Scams and How to Avoid Them. Retrieved from: http://www.pcsdebtrelief.com/credit-counseling-scamsand-how-to-avoid-them/
- NA, (2016), Credit Repair: How to Help Yourself, Federal Trade Commission. Retrieved from https://www.consumer.ftc.gov/articles/0058-credit-repair-how-help-yourself
- Zimmerman, S., (2016), Can Credit Repair Companies Really Improve My Credit Report?, ABC News. Retrieved from http://abcnews.go.com/Blotter/credit-repaircompanies-improve-credit-report/story?id=18511718