How to Avoid Credit Repair and Credit Counseling Scams

There are two terms that consumers with blemished credit reports should be careful with: credit repair and credit counseling.

Credit repair companies are to finances what car repair is to automobiles, only a touch shadier, if that is possible. Credit repair companies look under your financial hood and find problems on credit reports they claim only they can resolve, if you’ll pay them a fee.

Credit counseling services, especially the “for profit” agencies, operate under a similar premise. They want you to pay up front for them to diagnose trouble on your credit report and wipe it clean so you can get that loan you’re after.

Some of that is true, but most of it is baloney. No one can remove negative items on a credit report that are accurate. They stay there for seven years no matter what you say. If there are inaccurate items, you could remove them yourself at no cost.

The truth about credit repair companies and for-profit credit counseling agencies is that they “might” help you clean up your problems … and they “might” get you deeper into trouble.  Buyer beware!

Signs of a Credit Repair Scam

There are several obvious red flags to watch for before dealing with a credit repair company:

• The company requests a payment before any credit repair services are provided.
• Consumers are not informed about their 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 (EIN) 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 a lot of 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.

It is not all that difficult to find a reputable credit counseling organization. The most obvious way is to check if they are nonprofit and certified by the National Federation of Credit Counseling (NFCC). The NFCC is the largest and oldest nonprofit financial counseling organization in the U.S. It certifies counselors at all member organizations and renews that certification every two years.

Other sources worth checking include that state Attorney General’s office; the Better Business Bureau and the Consumer Financial Protection Bureau (CFPB).

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.

Reporting Credit Counseling & Credit Repair Scams

Credit repair fraud and credit counseling schemes are a constant source of complaint to government agencies.

If you feel have been a victim of deception or fraud, contact the CFPB, the Federal Trade Commission, the Better Business Bureau or the Attorney General’s office in your state to report the problem.

The CFPB said that nearly half the complaints it received in 2018 dealt with credit reporting, credit repair services.

The CFPB accused two of the nation’s largest credit repair companies, Creditrepair.com and Lexington Law, with using deceptive practices to trick and cheat consumers out of money in 2019. The CFPB also named five other credit repair companies in their lawsuit.

The bottom line is that credit repair should be a “Do-It-Yourself” operation. Give yourself time and educate yourself about good financial practices and you’ll repair your credit at no cost.