Beware of Credit Repair

Later this week, the Federal Trade Commission and several state attorneys general will announce a major sweep of fraudulent "credit repair" firms. Consumer protection professionals all over the country say they are seeing an aggressive resurgence of the credit repair scheme right now because so many Americans are having credit problems in this tricky economy. Don't fall for it.

It's ironic. People who are too strapped to pay their bills somehow scrape together enough money to pay a credit repair company. Credit repair companies claim they can erase negative entries on your credit report -- even if those entries are accurate. Sorry, nobody can do that for you.

Now, if there are mistakes in your credit file, you can correct those yourself. But companies that claim they can purge accurate information from your file are operating illegally, and if you hire one, you could be breaking the law too.

Click Here to Ask Elisabeth Your Consumer Questions About This Topic or Any Other Consumer Issue

Tiffany D. heard an advertisement for credit repair on the radio. Her credit was a mess, so she was intrigued. When she called, the company told her it could almost instantly "clean up" her credit record. So Tiffany made a $450 down payment for the company's help.

A couple months later, she still couldn't get a loan to save her life. She got suspicious, put a hold on her bank account so the company wouldn't take out any more payments, and called me.

I sent a producer into the company undercover. He signed up to get his credit repaired. A few days later, the company sent him three sealed envelopes that he was supposed to forward to the major credit bureaus. Of course, we opened them first.

The company had written dispute letters claiming our producer had never made a late payment -- even though he had. The company wrote all sorts of other lies and then forged our producer's name at the bottom!

Bombardment and File Segregation

Credit repair companies use a couple different strategies. The first is known as "bombardment." They flood the credit bureaus with paperwork disputing every single item in your credit report. They try to take advantage of a law that says credit bureaus must drop an entry if it can't be verified within 30 days.

Trouble is, that same law allows creditors to put an item back in your credit file once it is verified. So even if a credit repair company succeeds in creating chaos at the credit bureau, it won't last for long.

Another strategy is called "file segregation." Some credit repair companies counsel their clients to apply for an employee identification number. It has the same number of digits as a Social Security number. Credit repair firms claim you can create a new financial identity by using this number instead of your old Social Security number.

If you try it, you'll be breaking not one, not two, but three federal laws. It's illegal to apply for an employee ID number under false pretenses, to misrepresent your social security number and to make false statements on a credit application.

Of course, many credit repair companies don't bother with all these fancy strategies. Their method is much simpler. They just take your money and disappear.

The Federal Trade Commission says it has never seen a legitimate credit repair company. But just in case, the FTC has crafted a series of rules these companies must obey.

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