Recognizing a Credit Repair or Credit Counseling Scam

Just making a phone call or clicking a link online to a credit counseling or credit repair company should make you feel like you’re one step closer to putting your financial troubles behind you.

But be careful. Not all debt-relief companies are problem solvers. There are legitimate companies that can help and not-so-legitimate ones that are scam artists. They count on you being so desperate for help that you don’t see they’re about to make your bad situation worse.

You didn’t think that was possible? Think again. Credit repair scams can defraud you and damage your credit to disastrous level. Credit counseling agencies that steer you toward their own programs – and not the solution best suited to your situation – are equally disastrous.

You need to look carefully before you commit, especially with credit repair companies. The Consumer Financial Protection Bureau, a federal agency, filed suit against two of the largest in that field – Lexington Law and CreditRepair.com – in May of 2019. The CFPB accused the two of illegally charging consumers up front fees and using deceptive marketing practices to lure clients.

Five Signs of a Credit Repair Scam

There are several indications that you might be dealing with a disreputable credit repair company. Here’s our top 5:

1. They don’t explain your rights to you up front. All credit repair companies must provide you with a copy of the “Consumer Credit File Rights Under State and Federal Law” document. That lets you know, for instance, that you can dispute errors in your credit report for free. You don’t need a credit repair company for that; you can do it yourself.
2. They want you to pay up front. That’s a huge red flag. By law, a credit repair organization may not even request – much less receive – fees until it provides you a credit report that was generated more than six months after it began working with you. Don’t let them try to skirt this rule by getting you to make monthly payments. All forms of payment before services are completed are illegal.
3. They say they can remove negative information from your credit report, even if it’s correct. No one can do this. If the negative mark is accurate, it’s staying for seven years. Nobody’s getting it off. Don’t fall for it.
4. They promise to create a ‘new credit identity.’ Some companies claim they will create a CPN – credit profile number or credit privacy number – that serves as a new credit identity. Supposedly, you will use that number to apply for credit, instead of your social security number. They might even ask you to apply for an EIN – Employer Identification Number – which actually is legit with the IRS. However, neither number can be used as a substitute for your social security number.
5. Their contract is hard to understand. You don’t know how much you’re being charged, the services to be performed for you, the time needed to perform the services and that you can cancel the contract within three business days at no charge to you.

Signs of a Reputable Credit Repair or Credit Counseling Company

If too-good-to-be-true come-ons are hallmarks of a potential debt relief scam, openness and straight-forward language are signs that a company is legitimate.

Here are a few that you should see:

The company tells you what your rights are. You’ll learn that you can challenge information by writing to the credit bureaus yourself. You may choose to pay a company to do this, but you’ll make that choice knowingly. The company won’t pretend it’s the only one that can straighten out your credit, and it can show you why its services are effective.

The company talks it over with you before developing a credit strategy. It’s impossible for a company to say how they can help until they know your credit history. Expect them to ask questions and take a look at your credit reports before announcing a game plan.

The company doesn’t make promises it can’t keep. Raising your credit score by a certain number of points is an example of such a false promise. A credit repair company, can, however, show you results from its previous customers.

Choosing a Reputable Credit Repair Agency

If you’re feeling a bit skeptical at this point, good. This is a decision that rewards being careful. There are good companies out there.

To make sure the one you choose fits that category, check with your state attorney general’s office, the Federal Trade Commission and local consumer organizations such as the Better Business Bureau to see if there have been complaints.

Other Options for Repairing Credit

Credit repair companies are one option for improving credit, but there are alternatives.

Debt consolidation – The concept is simple: If you have high-interest debt and can qualify for a loan with a lower rate, do it. Debt consolidation can lower your monthly payments and reduce how much it costs to pay off what you owe. If you don’t qualify yourself, you may be able to find a co-signer or put up collateral to get the lower rate.

Debt settlement – Companies negotiate to get creditors to settle a debt for less than what you owe. The settled debt is gone, sometimes for as much as half of what you actually owed. The disadvantage is that your credit score does a nosedive, so any future loans will come with higher interest rates. The IRS also may consider the forgiven debt to be income and tax you on it.

Debt management – Credit counselors can create a debt management plan to pay down your debt. The counselors work with creditors to reduce the interest rate on your debt, sometimes dramatically, and lower your monthly payments to an affordable level. You make a single monthly payment to the agency, which then distributes the money to your creditors in agreed upon amounts. There are fees involved, but you can eliminate your debt in 3-5 years.

Take a hard look at your credit situation and find a solution that fits your needs and gets you on the path to solvency.