The recession ruined a lot of credit scores. Over the last four years, millions of Americans watched their credit scores plummet, and for many of the same reasons. Job and income losses forced people to over-rely on credit cards. Foreclosures and bankruptcy filings reached an all-time high. Bill payments were neglected. You know the story.
Credit repair companies have capitalized on the trials and tribulations brought on by the recession. While other companies and industries sank beneath the waters, the credit repair industry soared to new heights. Between 2007 and 2012, the industry grew at an annualized rate of 3.9%, reaching annual profits of nearly $10 billion (source: IBISWorld). Indeed, bad credit is good business for some.
Interestingly, there is no 800-pound gorilla among the credit repair companies. No single company has emerged to take a dominant share of the market. Instead, the industry is comprised of thousands of small companies, one- and two-person operations for the most part. Nationally, the industry employs about 158,000 people, according to a 2012 research report by IBISWorld.
Despite their enticing promises, credit repair companies have limited power. At best, they can help consumers take certain steps they could’ve taken on their own. At worst, they dupe consumers into paying up-front fees and then fail to deliver any results.
What Do Credit Repair Companies Do, Exactly?
How do credit repair companies operate? What types of services do they provide to consumers? In order to answer these questions, we need to take a look at how the reporting industry as a whole operates.
If you take out a loan or open a credit card account, the lender / creditor will report that new account to the credit reporting bureaus. There are three of these companies operating in the United States: Experian, TransUnion or Equifax. They are commonly referred to as ‘agencies’ and ‘bureaus,’ which makes some people think they are affiliated with the government. But they’re not. They are profit-driven companies, plain and simple.
So creditors report your credit accounts to these three agencies. But that’s not all they report. Your payment history gets reported as well. Timely payments, late payments, charge-offs, debt collections — all of these things get reported to the three bureaus.
The compiled data can then be processed through a credit-scoring algorithm to produce a three-digit score. This is the almighty credit score you’ve heard so much about. So your financial activity is captured in credit reports, and that information is used to generate scores.
How do credit repair companies factor into all of this? Most of these companies claim to help consumers by doing two things: (1) removing harmful credit entries that are dragging down the person’s score, and (2) counseling the consumer on the responsible use of credit. The first item is usually the main focus. Specifically, these companies offer to dispute negative information found within a consumer’s credit report, in order to improve his or her overall score. This is where the word ‘repair’ comes into the picture.
Pulling Back the Curtain
There are certain things you should know about these companies. Before you sign a contract or pay some kind of monthly fee, consider the following:
1. You can do it yourself for free.
Credit repair companies charge you for things you can do for yourself, for free. There are laws that regulate the removal of inaccurate information from consumer credit reports. The reporting bureaus must follow outlined procedures to investigate disputed information, and to remove that information whenever warranted. It all starts with the initial dispute, which you can do online. All three of the reporting bureaus have a “Disputes” section of their websites, for this very purpose.
Here’s an in-depth guide to disputing inaccurate or outdated entries that appear on your reports. You can also research this process on the FTC’s website.
2. They don’t have secret knowledge or techniques.
Credit repair companies often claim to have ‘specialized knowledge’ and ‘proven techniques’ that allow them to accomplish things you couldn’t accomplish on your own. Here is the source of their so-called specialized knowledge. As for their proven techniques, those are things you can easily do for yourself. We already talked about the online dispute sections of the three bureau websites. You can use these to dispute erroneous or outdated items found in your reports.
But here’s the thing. No one can remove negative but accurate information from your credit report. Let’s say you check your reports and find you have some late payments that were reported by your credit card company. You recall when it happened, so you know it’s a legitimate and accurate entry. By federal law, this kind of entry can stay on your reports for up to seven years. Credit repair companies may claim to have the ability to remove such items. But the fact of the matter is the reporting bureaus don’t have to do a thing. They have to investigate the dispute, sure. This much is required by law:
“If you identify information in your file that is incomplete or inaccurate, and report it to the consumer reporting agency, the agency must investigate unless your dispute is frivolous.” –Source: Federal Trade Commission
But if the reporting agency finds it to be an accurate and legitimate entry (and the entry hasn’t yet reached its ‘drop-off’ age), they will leave the item on your reports. And you’ve just poured money down the drain, in the form of whatever fees you paid to the credit repair company. It’s a common scenario in this industry. The consumer pays good money for services undelivered.
There are two scenarios where you can have information removed from your reports:
- The entry is erroneous. Examples include a credit card account that is not yours, a collection event that never actually happened, etc.
- The entry is accurate but beyond its allowable reporting period. Example: A late payment that happened eight years ago.
On the contrary, if a negative entry is (A) accurate and (B) within the allowable reporting window, it will likely remain on your reports no matter how many times you dispute it.
3. They are heavily regulated by the FTC.
You have to be wary of an industry that warrants special attention from the federal government. Such is the case with credit repair companies. Indeed, this is one of the most heavily regulated and frequently investigated industries in America.
The Credit Repair Organizations Act is a good example of such legislation. Technically, it’s not an act, but a provision of the Consumer Protection Credit Act. Whatever your call it, this set of laws imposes a number of restrictions on the claims made by credit repair companies. It is designed to prevent the kind of false and misleading advertising that is so rampant in this industry (see item #4 below). It also enables government officials to impose fines, and even prison sentences, on individuals who violate those guidelines.
Here are two key provisions from this set of laws:
- No up-front payments. “No credit repair organization may charge or receive any money … for the performance of any service which the credit repair organization has agreed to perform for any consumer before such service is fully performed.”
- Contracts are required. “No services may be provided by any credit repair organization for any consumer unless a written and dated contract (for the purchase of such services) … has been signed by the consumer.”
These companies must also provide you with certain disclosures relating to their services. Specifically, they must point out that you can dispute inaccurate information in your reports all on your own, if you choose. The company must also disclose that “neither you nor any ‘credit repair’ company … has the right to have accurate, current, and verifiable information removed from your credit report.” Sound familiar?
When an industry is heavily regulated by the government, you can rest assured there are good reasons for it. (The banking industry, anyone?) This is true of credit repair companies, as well. And that brings us to the next item on our list.
4. They are one of the more scandalous industries in the financial sector.
There have been hundreds of cases where a credit repair company was investigated for violations of the law. These violations usually fall into one of two categories: (1) false or misleading advertising, or (2) collecting payment for services not delivered. In many cases, both of these violation occur simultaneously. It’s a common pattern in the credit repair industry. A company makes bold and far-reaching promises about its ability to clean up the consumer’s credit report. It charges ongoing fees for these services. But all too often, nothing productive comes out of the process.
Take the case of Kevin Hargrave, for example. His Florida-based credit repair company ‘served’ people all across the country. According to one of his radio advertisements: “Hargrave & Associates covers all three major credit bureaus, slow pays, charge-offs, repossessions can be erased for two-hundred, fifty dollars.”
The Federal Trade Commission filed a complaint against Hargrave in 2008, alleging false advertising and the illegal collection of up-front fees for his so-called credit repair services. In 2010, a U.S. district court agreed with the FTC and barred Hargrave from making misleading statements and charging up-front fees. In May 2012, the court had to freeze his assets and issue a restraining order, in response to what they viewed as continued violations of the injunction. You can view the full legal history here.
This is a common scenario among credit repair companies. And it begs the question: Are there any good apples in this bunch? Possibly. But who wants to sift through all of those rotten apples?
These scams are so common that federal and state agencies have created extensive educational campaigns to counter them.
This ad from New Jersey’s Division of Consumer Affairs is a good example. On their website, they offer a consumer brief entitled “Credit Reports and Credit Repair.” Here’s a quote from the brief:
“You have seen ads, billboards and TV commercials where credit repair companies promise to ‘erase bad credit.’ Typically they charge $50 to help you, but frequently they do nothing to help before taking your money and disappearing.”
This is just one example of state officials protecting their constituents from credit repair companies. There have been dozens of similar efforts in recent years, at all levels of government.
5. Non-profit credit counselors will help you for free, or for a very low cost.
Don’t confuse the credit repair companies mentioned above with non-profit credit counselors. They are two different things entirely. Unfortunately, the former gives the latter a bad name, as they are often lumped together in the minds of consumers.
Non-profit credit counselors provide a legitimate service, and often for free. When they do charge for their services, it is typically a very small fee to help cover their operating costs. They do not make bold but empty promises. They do not promise to ‘wipe the slate clean’ or boost your credit score in 90 days or less. They teach consumers how to take control of their credit, how to dispute erroneous information found on their reports, and how to develop good habits that pave the way to financial success. They are the unsung heroes of the credit world. Perhaps it is time to sing their praises.
The National Foundation for Credit Counseling (NFCC) is a legitimate non-profit counseling agency, with offices located in all 50 U.S. states. Springboard (credit.org) is another legitimate non-profit in this sector.
Here are some tips for choosing the right counselor:
- Consider the two organizations mentioned above.
- Review the FTC’s guide to choosing a credit counselor.
- Check out the Department of Justice’s list of approved counseling agencies.
- Watch out for imposters. Just because a company claims to be ‘non-profit’ doesn’t mean that it truly is. A lot of for-profit credit repair companies run advertisements on Google’s search engine with ‘non profit’ in the text. Do your homework to be sure. Use the DOJ list provided above.
What to take away from this article: You can do it yourself, for free. There are legitimate counselors who can steer you in the right direction, for free. You can dispute items on your credit reports, for free. And you can obtain your reports from all three bureaus once a year, for free.