How to Recognize a Credit Repair Scam
When you have bad credit and tempting credit repair offers, such as “Create a new credit identity legally!” or “Remove negative credit history easily!” appear in your mailbox, keep calm — they may be sneaky credit repair scams.
These ads may sound like exactly what you need, but they are usually too good to be true — there is no quick fix to damaged credit. The Federal Trade Commission, a federal consumer protection agency, says legitimate credit repair operations have never made those claims.
Avoiding credit repair scams: What to watch out for
The FTC has listed the following warning signs of credit repair scams if the company:
- Wants you to pay upfront for credit repair services before doing any work.
- Doesn’t tell you your legal rights.
- Asks you not to contact credit reporting agencies.
- Advises you to dispute information that’s accurate but negative on your credit report.
- Tells you to lie on your application for a loan or credit.
It’s important to identify those red flags to protect yourself. Besides the exaggerated promises, some credit repair companies may claim they can create a whole new identity for you for a fee to hide your history, which is illegal, according to the FTC.
Such services may give you a nine-digit number that looks like a Social Security number. Scammers may call it a CPN — a credit profile number or a credit privacy number. Or, they may encourage you to apply for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). EINs are legitimate identification numbers used for businesses but they are not for individuals. The company then will then advise you to apply for credit with the new number.
If you fall for these scams, you could end up in prison or with steep fines. Lying on credit applications is a big deal. The FTC warns that you may commit a federal crime if you:
- Provide false information on a credit or loan application
- Misrepresent your Social Security number
- Acquire an EIN from the IRS under false pretenses
Determining which companies to trust
Credit counselors interviewed by LendingTree said it’s possible for consumers to repair their credit by themselves (we will talk about this in a sec). However, If you don’t think you are disciplined enough to do the repair work yourself, the FTC suggested you work with a reputable credit counseling firm, many of which are nonprofits.
A credit counselor can educate you on how to get your finances in order. They may help you work out a repayment plan with your creditors or help you keep track of your bills, but there may be fees associated with such services.
Most credit counselors offer services through local offices, online or by phone. To pick a reliable credit counseling firm, visit the Financial Counseling Association of America or the National Foundation for Credit Counseling. You can also find a list of approved credit counselors through the U.S. Department of Justice.
The Consumer Finance Protection Bureau advised that once you nail down a few potential credit counseling organizations that you may want to work with, check out the companies with your state attorney general and state consumer protection agency to find if there are complaints about the companies on file.
Before committing to anything, you should ask the counseling organizations for free information about their services and fees. A reputable credit counseling organization can offer education on how to manage your money and debt and assist you in creating a budget. Legitimate credit counselors won’t practice any of the strategies mentioned in the previous section.
To get a partnered with a trusted credit repair company through LendingTree click here.
What to do if you feel like you’ve been scammed?
If you miss the red flags and feel like you fell for a scam, there are two ways to report credit repair fraud, according to the FTC:
Contact your state attorney general
The CFPB said credit repair companies are subject to laws, including the Credit Repair Organizations Act and often the Telemarketing Sales Rule, which bar credit repair firms from using deceptive practices and from accepting upfront fees. If you come across anything dodgy with a company, report it to your local consumer affairs office or your state attorney general.
Federal Trade Commission
You can also report the fraud to the FTC online at ftc.gov/complaint or call 1-877-FTC-HELP. Although the FTC can’t resolve individual credit disputes, it can take action against a company if it shows a pattern of violating laws.
How to improve your credit without hiring credit repair companies
As we said earlier, you can repair your credit yourself without any costs. In fact, Edward Sanchez, president of Chicago-based MoneySharp Credit Counseling, said he encourages consumers to do the repair work on their own so that they have a better sense of their finances.
Rebuilding credit is not easy and won’t happen overnight. However, as long as you are determined to rehabilitate your credit score and discipline yourself, you will see your credit improve over time. Below are some of the fundamental things you can do:
Monitor your credit report
Pull your free credit report and carefully review your lines of credit, debt amount, payment history and derogatory remarks. Credit counselors said it’s possible that incorrect, negative information exists on your file by error. You should check your credit report routinely and dispute inaccuracies with your credit card company; you don’t want such information there to continue dragging your score down. Getting errors off your credit report can quickly improve your credit as can reporting good behavior—make sure your responsible lending behaviors, such as paying bills on time, are reported to the credit bureaus.
Pay bills on time and in full
Your payment history makes up 35% of your credit score. A history of consistent on-time payments is the most significant factor in your credit score calculation. Don’t wait to pay your bills. If you have a hard time tracking your payments, set up automatic payments through your bank or consider using budgeting apps. In addition, save yourself money by paying off your entire bill. Paying the minimum amount due will only result in you paying high interests, which won’t help with your credit score.
Keep balances low
Don’t max out your credit cards. Try to keep your balances under 30% of your overall available credit limit. This is because lenders see those with high balances on credit cards and other revolving credit accounts as risky borrowers. When your credit needs repair work, you want your credit reports to represent you as a responsible borrower.
Get a secured credit card
With a secured card, you’ll use your own money as collateral by paying a deposit to your lender, which is often about $150 – $300. The amount of your deposit will be your credit limit. The card will then operate like a regular credit card. Use it as a tool to prove your responsibility and reliability as a borrower: You should make small purchases each month and then pay them off on time and in full.
Apply for new loans or credit strategically
It’s a mistake to apply for a new credit card or loan when you need to borrow more. By doing so, you may end up getting caught in the debt cycle all over again. You should only open new accounts as you slowly rebuild your credit, and the new loans or credit cards should serve an exclusive purpose of building credit. This means you need to keep your balance low and pay it off in full on time each month.
“They’re not used for [an] emergency; they are not used for points; and they are not used for rewards,” Sanchez said.
Spend less than what you make
“You can’t just be an impulse buyer on things,” Sanchez said. “If you know that you need $2,800 to cover your expenses on a monthly basis, and you know that you bring home $3,100 a month as a base… you only have a $300 buffer.”
Build an emergency fund
Many people get trapped in the debt hole because they keep supplementing new expenses with more debt. If you have a cash reserve, which typically covers three to six months of your necessary living expenses, when an emergency arises, such as job loss, you won’t have to turn to your credit card. To be sure, savings worth three to six months of expenses takes time to build. However, if your start stashing money each month now, you will eventually have a cushion to fall back on next time an emergency occurs without having to borrow even more.