When poor financial decisions catch up to you, it can be tempting to look for quick fixes. After all, a low credit score can cost you sometimes thousands of dollars over time in high-interest fees, application fees, and so on. And a recent report from the Federal Trade Commission revealed that 1 in 5 consumers had a mistake on their credit report, from no fault of their own.
Many consumers turn to credit repair companies to resolve issues and improve their credit scores. The problem is that some of these companies operate unethically and illegally, asking for big sums of money upfront and promising outrageous results. So how can you tell the scams from the good guys?
Credit Repair Scams
Preying on the vulnerable is one of the most common forms of criminal behavior, and it’s the name of the game when it comes to fraudulent credit repair. It’s so common, in fact, that the federal government created the Credit Repair Organization Act (CROA), enforced by the Federal Trade Commission, to protect consumers from credit repair scams.
So how can you tell if an offer is only a scam? Here are some red flags to watch out for:
- They charge an upfront fee. This is illegal, and you should never pay for a service until it has been performed according to your contract.
- They only accept cash. This means the “company” is trying to be untraceable, and is a huge warning sign.
- They offer you a “new identity.” Usually this means they give you a special “code” that you are instructed to use instead of your social security number. In reality, this is probably a stolen social security number, often from a child so that nobody will report the fraudulent activity. But if you ever fill out a form or application using the wrong information intentionally, you have committed fraud and identity theft and could be subject to fines and even prison time.
- Fees and processes are unclear. A legitimate company is honest and has a reputation of helping others. If a company says they discovered a secret loophole in the law, run. The law is the law, and there is no honest way around it.
- Guarantees a specific raise or promise. If a company promises they can improve your score by 100 points or another specific number, this is a big red flag. A reputable company can tell you about similar experiences with other clients but that doesn’t guarantee a specific result for your case.
- Contacts you AFTER a bankruptcy. Information about your bankruptcy is public information, so if someone contacts you after the fact promising to remove it or improve your score, they’re preying on the vulnerable.
- They tell you NOT to contact any credit repair companies yourself. A legitimate company will tell you upfront that you have the right to repair your own credit. If a company tries to hide this fact or flat out lies about it, you should be leery.
- They say they can erase negative items, even if they’re legitimate. By law, you are entitled to a fair and accurate credit report. If there is incorrect information on your credit report you are entitled to dispute the information and have it removed. If the negative items on your credit report are legitimate, do not trust a company saying that they can erase them.
- It sounds too good to be true. Scammers are always finding new angles to attract victims, so always do your research on a company and be cautious of any that make outlandish promises.
What a Credit Repair Company Must do
The CROA requires credit repair companies to be upfront and honest. When you are looking for a credit repair company, make sure that they comply with the following requirements:
- They explain your legal rights in a contract, along with the services agreed upon
- They inform you of the timeframe for their work and results
- They give you the total cost expected after services have been performed
- They inform you of your 3-day right to cancel without charge
- They explain any guarantees
One way to test out a credit company and get to know their services and offerings before paying a penny is to take advantage of a free consultation over the phone.
For DIY credit resources, check out our tips and tricks page.