How to Avoid Credit Repair Scams – Forbes Advisor

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You’ve seen prices rise, read headlines about layoffs, and heard rumors of a recession in the air. The Federal Reserve also reports people are falling behind on repayments of more loansalthough this is happening at lower rates than before the pandemic.

A missed payment on a loan or credit card can end up on your credit reports and hurt your credit scores, making it harder and more expensive to get a new loan. In some cases, a lender will refuse to lend you money.

Consumers can turn to credit repair companies for help. Companies try to improve your credit scores by challenging negative information on your credit reports, and your scores could increase if negative scores are changed or removed.

Credit repair can be helpful, but people tend to turn to credit repair when they need quick help, perhaps right before buying a new car or house. Unfortunately, you’re also vulnerable when you’re under duress, and some credit repair companies take advantage of this to defraud unwitting consumers.

How Do Some Credit Repair Companies Scam Consumers?

A well-meaning credit repair company might uncover errors that you are missing, and they might be able to get largely accurate negative information removed from your credit report due to technicalities in the reporting process or dispute. Some also educate customers on how credit works and how to improve your credit on your own.

But some companies are pure scams that criminals set up to steal your money.

Credit repair scams promise results and can’t deliver, or use tactics that could hurt you in the long run.

“The path [credit repair companies are] doing so is either abusing loopholes or doing illegal or fraudulent things. says Thomas Nitzsche, certified financial educator at Money Management International, a nonprofit credit counseling organization.

Here’s what you should pay attention to.

You pay and get nothing in return

The simplest scam is when companies take your money and do nothing in return. Even legitimate businesses can’t charge fees for services they didn’t perform if they comply with federal law. Credit Repair Organizations Act (CROA).

They are breaking the law to try to improve your credit score

Fraudulent credit repair companies could file a police or identity theft report on your behalf then use the report to claim that your accounts with negative information were opened fraudulently. This can sometimes work, but it is also illegal to file false identity theft or police reports.

Even though the tactic improves your credit, it can backfire when the scheme is discovered. And, regardless of your credit scores, you might find it harder to qualify for new credit, as the tactic can trigger red flags from lenders when you apply for a new loan or credit card.

They suggest you file fake identity theft reports

Nor should credit repair companies suggest that you say or do anything that is not true.

“Making a fraud report is a big deal and making a false police report is a crime,” says Matt Liistro, board member of the American Association of Consumer Credit Professionals, a credit repair association. “Getting a consumer to go do it is a red flag.

You shouldn’t have to lie about your credit history either. “If you see something that is legitimately not correct, then by all means challenge it,” says Nitzsche. “But if something is factually true, then you probably shouldn’t dispute it as incorrect.”

They guarantee results

Even companies with the best intentions should not guarantee or too promising results, such as a specific score increase or an increase in your score by X points in Y days. “Warranties are a red flag,” says Liistro. “Companies that say they’re going to withdraw something in 15 or 30 days…you have to wonder how that’s done.”

Some companies offer a money back guarantee, but this is different from guaranteeing a quick improvement in your credit scores. “Generally, you want to be on the lookout for any company that claims to be able to do anything overnight,” says Nitzsche.

They recommend setting up a Credit Privacy Number (CPN) or EIN

Some credit repair companies tell you that you can start fresh by creating credit that is not tied to your social security number. They might suggest using and trying to sell you a Credit Privacy Number (CPN) or Employee Identification Number (EIN).

What the company doesn’t tell you is that the CPN is usually someone else’s SSN. These numbers often belong to a child, an elderly person or an incarcerated person, because these people do not regularly check or use their credit. “Stay away,” warns Liistro, “it’s almost always a cheating situation.”

You may not realize it, but you could be breaking the law if you buy and use an EIC, and you could even face jail time. Although using an EIN to build credit is not illegal, it is how businesses build their business credit– using the EIN instead of your SSN for a personal credit application could be a crime.

How to spot a credit repair scam?

Scams can be hard to spot, especially if the company doesn’t realize or believe they are doing something wrong. Watch for these red flags:

  • Requires upfront fee
  • Promise to remove all negative information
  • Guarantees a specific score increase or schedule
  • Suggest using a CPN or EIN
  • Offers to sell you a commercial line or authorized user account
  • Doesn’t tell you you can dispute credit report errors for free
  • Company name closely matches a large corporation or government agency

“Do your homework before committing to an organization,” advises Nitzsche. “Often a simple Google search will reveal if a company isn’t great or is a fraud.”

Additionally, you can use an initial consultation to ask questions that may help weed out suspicious companies:

  • Who owns the business? Owners who have nothing to hide should not hide their name.
  • What percentage of clients do you turn away? “A good company doesn’t accept everyone,” says Liistro. “Stay away from any company that says it helps everyone – credit repair isn’t for everyone.”
  • Do you have reputable accreditations? As the accreditation of the National Association of Credit Service Organizations (NACSO) or the Better Business Bureau (BBB).
  • How will you help me get the result I want? It’s a bit of a trick question. If they say they can definitely help you or that they will remove all negative items from your credit report, that is your signal to steer clear.
  • How much will it cost? Credit repair companies often charge a monthly fee or a fee for each negative item they remove. Don’t expect an exact amount or a guarantee, but, says Liistro, “most companies will estimate and show you how much you’ll pay if they remove X number of negative ratings.”
  • Can you share a copy of your contact? Credit repair companies must have a written contract that includes terms of payment and a detailed description of the work they will perform to comply with the Credit Repair Companies Act.
  • What will you do if you find something wrong with my credit report? Liistro says you want to know if they will only write to the bureaus (Equifax, Experian and TransUnion) or if they will also send disputes directly to creditors.

Alternatives to Hiring a Credit Repair Company

Credit repair isn’t a quick fix, and even if it works, it can take months. “The time to worry about your credit isn’t when you’re going to apply for a home loan or a car loan,” says Nitzsche. “You don’t build credit overnight and you don’t erase [bad credit] overnight either.

If you are having trouble paying your bills, you can seek help from a credit counseling agency instead of a credit repair company. Credit counselors can negotiate with your creditors to offer you a more affordable payment plan and work with you to get your finances in order and build credit over time. But advisors don’t remove negative items from your credit reports.

Look for National Credit Counseling Foundation-accredited organizations offering certified products credit counseling to find one that offers a free initial consultation to review your budget and explain your options.

Also, deleting previous negative marks won’t necessarily help if you’re struggling with your bills. Some alternatives to consider include:

Each route has advantages and disadvantages, and a good credit repair company representative will guide you to the best fit rather than pushing you towards credit repair as the only option.

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