Beware of Credit Repair

Oct. 20, 2008 — -- 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.

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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.

Credit repair companies are not allowed to take money up front before they do any work. They're not supposed to make false claims about their services. They must tell you that you have three days to cancel and then honor that waiting period. And they have to give you a written contract that includes the price, the precise services they are offering you, the length of time it will take to get results, any guarantees and the company's official name and business address.

Scam credit repair companies should not be confused with legitimate credit re-scoring companies, which I will be profiling on "Good Morning America" this week. Re-scoring is available only through your mortgage lender. And here's the difference: Credit re-scoring involves rapidly correcting mistakes in your credit record to raise your score. Re-scoring professionals will not try to change negative credit entries that are true.

Know the signs:

1. Credit repair companies advertise directly to consumers on the radio, the Internet and on telephone poles!

2. They claim they can quickly fix your credit situation, no matter how atrocious it really is. These grandiose claims are one of the signs to watch out for.

3. If a company asks you to pay for credit repair services up front, that's a bad omen, indeed, because it's illegal.

4. Credit repair companies often discourage you from contacting the credit bureaus directly.

5. If somebody suggests that you apply for an employer identification number and use that instead of your Social Security number when you apply for credit, that's a telltale sign of fraud.

6. Credit repair scammers may advise you to dispute all the information in your credit report, even entries you know are true.

Do your homework:

1. If, after reading this column, you still somehow believe a credit repair company could be legit, then for goodness sake, check out the company with the Better Business Bureau and your county and state consumer protection offices. Also type the name into an Internet search engine and see what comes up.

2. Consider disputing errors in your credit history yourself for free! Start by ordering your free credit reports from www.annualcreditreport.com.

How to complain:

Since credit repair companies operate illegally, contact your state attorney general if you have been victimized. Also file a complaint with the BBB to help other consumers.