There is a constant barrage of advertisements for credit repair companies on radio, television, print media, and the Internet that target people with bad credit. They imply or directly promise that they can “fix” your credit or significantly raise and improve your credit score. In many cases, these solicitations or statements are misrepresentations or lies as to what legally can and cannot be done. And they charge a lot of money, often more than a thousand dollars for each account to “fix.” Some of these companies are total scams, preying on the poor, uneducated, or people that have found themselves in dire financial straits. They desperately need credit which is unavailable, ultimately because of low credit scores. These scores, which are relied upon by virtually every creditor, provide a snapshot of an individual’s financial responsibility.
Anyone that has a low score understands that bad credit costs a lot of money in terms of higher interest rates if they are even able to obtain credit at all. It can also mean higher insurance rates, larger deposits for apartments and utilities, and more difficulty in anything that involves payments.
So an entire industry of “credit report fixers” has evolved to “help” the consumer improve their credit scores and their ability to get the things they want or need. The problem is that a lot of these companies are fly-by-night, they are making and charging for promises they cannot legally accomplish, and are taking money for services that the consumer can perform for themselves for free. In some cases, credit repair companies are even set up to steal identities which then drives the debtor farther into trouble.
Credit scores are complicated
The critical factor and product that these companies sell are all tied to credit scores. The scores assess hundreds of factors on an instantaneous basis as new data is fed to the Credit Reporting Agencies about you. Ultimately your credit score will determine whether you are able to obtain credit, and how much it costs you.
Depending upon what kind of credit you are applying for, the score can be different because of individual lending parameters and the creditor’s appetite for risk. Your score can even differ between lenders for the same amount of credit. The issue is further complicated by which credit reporting agency produces the score. Thus, one CRA may report a score of 759, while another will report 793 and a third, a score of 777. And it does not matter what your income is, but rather how you pay your bills. Your credit history is what is important, not your assets or ability to pay.
There are two primary credit scoring systems (and hundreds of variants customized for a specific lender) which are relied upon by a majority of creditors in assessing the credit worthiness of an applicant. The most known system is called FICO, developed by Fair Isaac Corp. It was the first scoring model that was developed for banks and came into wide use in 1989. The other scoring system is known as VantageScore 3.0 and was developed by all three of the Credit Reporting Agencies to compete with FICO.
It is relied upon by about 80% of lenders and creditors. Depending upon where you live, information is generally fed to one of the three CRAs by creditors. Experian, TransUnion, and Equifax all do the same thing: they store your information and feed it, on-demand, to lenders. How your credit report is accessed from which CRA can affect the score. The other important factor is that credit scores are dynamic indicators that constantly change. They are a real-time yardstick and are affected by a great deal of data about you.
I interviewed several senior Experian representatives about credit reports and credit repair companies, in addition to talking with Adam Levin, Chairman of Credit.com, which was a follow-up discussion with Adam about protecting your credit reports from identity theft. Adam is one of the leading experts on credit in the United States.
Credit Repair Organizations and the law
The applicable federal statute is called the Credit Repair Organization Act, (15 USC 1679). It provides the legal framework for companies to provide services, and makes it a federal crime and provides civil remedies against those that violate the Act. A credit repair organization is defined as any person or business who makes money in exchange for improving your credit. Unfortunately, there is little enforcement for violations by the FTC, so you must know who you are dealing with before you obtain any services. There is a five-year statute of limitations to file a complaint, once a violation is discovered. And remember, many of these companies state that they offer “legal credit repair.” It does not mean they do, and is often simply a ruse to induce you to sign up with them.
Here is what credit repair organizations cannot legally do:
- Ask for money before they perform services;
- Make false statements about you or your credit history, or induce you to do so;
- Make any changes in your identity which would prevent a valid search from being conducted. This means changing any part of your social security number or employer identification number, which would allow you to establish a new identity in order to start a new credit history;
- They cannot misrepresent services they will provide to you;
- They must provide you with a disclosure statement called “Consumer Credit File Rights Under State and Federal Law”;
- They must inform you that you have a right to obtain a free credit report from all three CRAs each year. Go to www.annualcreditreport.com
- They must inform you that you have the right to dispute inaccurate information without their help;
- You have the right to file a lawsuit against a credit repair organization if they violate the provisions of CROA and you may be entitled to actual and punitive damages and attorney’s fees for violations;
- You cannot be charged for canceling a contract within the three day period;
- Before any services can be performed, they must give you a written contract, and you must sign it;
- Any contract you sign can be revoked within three days;
- Any contract you sign must include, at a minimum:
- The amount of payment that will be required;
- A description, in specific terms, of the services they wil perform;
- An estimate of time it will take to perform the services;
- Be certain that the contract includes a form to provide notice of cancellation;
- You cannot be required to waive your rights under CROA. Any such waiver is deemed void and not enforceable.
Warning signs that it is a scam:
- They will claim that they can increase your credit scores, but will not be specific;
- They will not give you a copy of the contract prior to signing it;
- They fail to tell you that you have a right to dispute information and that you can obtain your credit report without their help;
- The company promises to create a new identity;
- They promise to remove accurate, but derogatory information from your credit report;
- They demand money up-front before they perform services;
- They do not tell you that you can cancel within three days;
- They will not provide any date by which services will be performed, nor will they specifically identify each service;
- They will not tell you exactly how much will be charged;
- They want money, usually up-front and on a per-account basis to increase your credit score.
Creditors and your credit information
Credit information is analyzed somewhat differently by each lender or creditor and can be affected by many factors. Most consumers do not understand how the system works and often take steps in the mistaken belief that it will improve their credit scores.
The entire credit reporting system is voluntary and is for the benefit of all lenders as well as consumers. It is based upon trust and the integrity of the information. The improper removal of accurate data would undermine the entire system, which is why creditors are prohibited from removing negative but correct information from your credit file. Creditors are bound by federal law to report accurate information and also by contracts with the credit reporting agencies to do so.
The entire system is based upon the sharing of information so lenders can make sound decisions. The system helps people obtain credit at the lowest possible costs, so it is valuable as a tool to mitigate risk. The credit reporting system is an integral part of business, and depends upon everyone cooperating. These fundamental principles are why most credit repair organizations are ultimately a scam, because they cannot make bad credit good if the underlying data is accurate.
Actions that can affect credit scores:
- Use of ATM, debit, or prepaid credit cards will have no affect because they are not reported, but use of secured cards can help in building a good credit history;
- If you close accounts, your credit score will be adversely impacted;
- If you do not need credit, do not apply for it. It is especially important not to open accounts just because they are offering you a discount, such as in a department store. Unless you are going to make a lot of purchases, these accounts hurt your credit;
- The utilization ratio of your credit accounts is important. If you close one or more accounts, your utilization of credit ratio will go up, and have a negative effect on your score;
- If you are going to be applying for credit, leave your accounts alone. Utilization is a better indicator of risk in comparison to how many open accounts you have;
- High school kids should establish a credit history as a joint cardholder, not as a separate account;
- Pay all your bills on time, including utilities and rent;
- Credit inquiries can hurt your credit. Too many “hard” credit inquiries on your account signals distress;
- Do not drive up your credit limits, and only use a maximum of 30% of your credit limits on each account;
- Open credit cards have a positive impact on your credit, so long as you do not exceed the 30% limits rule;
- More weight is given in your credit score to open accounts;
- Dormant accounts, or paid and closed and never-late will not boost your score;
- Do not have any delinquency or derogatory information;
- Do not continue to have zero balance accounts. Make a charge periodically to show some activity;
- Do not close all cards at once, but on a random basis if you want to reduce the number of credit cards you have. Your credit score is looking at what is active;
- Your creditor will add up all your account balances to determine whether you are over-extended;
- Do not leave debts unpaid, even if late;
- If you make a settlement agreement with a creditor, get it in writing;
- When you pay a debt, it does not mean it will be removed from your credit report if it was late, or settled;
The following specific issues will always hurt your credit:
- Too many credit cards;
- Debt ratios;
- Slow payment history;
- Late payment history;
- Defaults and write-downs
- Judgments and liens;
How long information is stored in your file
Information is stored on the system for up to ten years, depending upon its classification
- Credit items, credit cards, bank accounts, and every late-pay will remain for seven years;
- The status of an account as paid, closed, never-late will appear for ten years from date of closure;
- Open, never-late remains forever;
- Payment history and closed account, ten years;
- Credit inquiries remain for two years and one month;
- Current creditors have a right to review your credit files. These will not show up on your repot as hard inquiries but will also remain for 25 months. They will not affect your credit scoe;
- Merchants are required to either fix a disputed item, or respond within 30 days of being notified;
According to Rod Griffin, the Director of Public Education at Experian, here is what many illegitimate credit repair companies really do in the guise of helping their clients:
- They send hundreds of disputes to credit reporting agencies. They rely on the fact that some creditors may miss the 30 day mandatory response period, which requires the CRA to suppress the information from the credit file. Unfortunately for the debtor, this information can now be re-inserted later. This means that what the credit repair company was paid to accomplish actually was reversed and the money paid to the company was for nothing;
- More than half of the disputes to redit repair agencies are from credit repair companies. It is a paper game;
- If the dispute is identified as frivolous from a credit repair organization, it will be declared as fraudulent, and the CRA can block, the process;
- Consumers are constantly scammed into spending money for things they can do themselves;
Actions that consumers can do themselves to fix their credit
I interviewed a senior credit counsellor at Experian to review the intricacies of a credit report, and what a consumer should and should not do to affect their scores. Here is what she told me:
- Consumers can contact credit reporting agencies by email, by mail, or on-line to dispute inaccurate information. The process is simple and straightforward. They do not need someone else to do it for them for a fee;
- Consumers should use the money they would pay to repair organizations and give it to their creditors. Credit repair organizations are a short-term solution, which usually ends up in the debtor taking on more debt. Consumers are far better off paying down their debt;
- Credit reporting agencies can only remove inaccurate or erroneous information. They cannot legally alter or remove any accurate data, so the premise of what credit repair organizations claim they can do is flawed;
- Get a written statement from the creditor that indicates the information is wrong, or the account has been paid;
- Place a statement on your credit file if you have experienced a significant event in your life that has had an adverse impact on your ability to meet obligations. Fraud, identity theft, lost wallet, and serious medical issues can be noted in the file. There are instance where debtors get into trouble and a lender may waive the content of a negative report. As the result of an action by the New York Attorney General, credit reporting agencies will not report medical collections for up to 180 days;
- Work directly with your credit reporting agency;
- Check your credit report before you apply for credit, so you can correct any errors.
Before you apply for credit
Ask your creditor about their relationship with the credit reporting agency. Remember that credit reporting agencies only store data and cannot provide a credit score, unless it is based upon the Vantage 3.0 model.
Specifically ask your creditor:
- Do they report information, and if so, how and what information do they report, and to whom;
- What is the policy of the company regarding late payments;
- Does your company use credit scores, and if so, which model;
- Do they rely upon these scores;
- What is the range of credit scores they require for the credit you are applying for;
- If you are dealing with a property rental, do they report information, how soon do they begin reporting, and to what database.
If you are in trouble and thinking about using a credit repair company, remember there is nothing they can legally do to remove accurate yet derogatory information from your file. Whatever they can do, you can do for free. You have the right to dispute any information that is wrong and have it removed from your credit report. If you commit fraud in attempting to change the information on file, you can be prosecuted.
If a negative item is erased from your credit report, it may reappear after a period of time, so you will likely accomplish nothing by paying an illegitimate company to “fix” your credit. And if you succeed in totally wiping out your credit history by altering or creating a new identity, you will not be able to obtain any credit either, because a lender will have no data upon which to base a credit decision.
If you need help in repairing your credit, there are many legitimate companies that can assist you, but you need to research carefully to be certain the company is not a scam.
My best advice: work directly with a credit reporting agency like Experian. For $40 they will analyze your credit file and discuss it in detail with you, as well as running a simulation of payments to help you optimize the application of resources against your debt to drive up your credit score. All three CRAs have such programs.