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Do credit repair companies really work?

Credit report graphicYou see the ads on the internet, television, radio, and social media. "We can fix your credit and raise your credit score". But is it true?

Your credit history and credit score permeates every aspect of your life. From obtaining a credit card, to obtaining a mortgage, a car loan, even obtaining an insurance policy. A few late payments on your credit report can spoil an otherwise exemplary payment history. Most people don't think much about their credit report or credit score until they're impacted by their credit history. Did you know that prospective employers are allowed to review your credit report, provided you give the employer permission? And why wouldn't you, you want the job.

After facing the unpleasant realities of your credit report, you might turn to a credit repair company for a fast credit fix. But can credit repair companies really fix a bad credit report?

The answer is "yes", but, some credit repair companies use legal methods and some unscrupulous companies employ deceptive credit repair tactics. In 1996, Congress passed the Credit Repair Organizations Act (CROA). This law laid down the rules for credit repair companies. Here are a few prohibited practices under the Credit Repair Organizations Act:

  • Advising credit repair customers to change their identification to prevent the credit bureaus from associating them with their credit information
  • Advising credit repair customers to make false statements to credit reporting agencies
  • Guaranteeing that they can remove information from their credit repair customer's credit reports
  • Charging credit repair customers any fee for services that have not been fully rendered

The CROA also requires credit repair providers to inform their customers of the following:

  • Customers have the right to challenge their own credit report records for free
  • Credit bureaus must use reasonable procedures to maintain the accuracy of credit information, mistakes may occur
  • Consumers can sue the credit repair company if the company violates the CROA
  • Credit repair companies are not allowed to conceal the notices above inside their contracts.

How do credit repair companies fix a person's credit report?

The first step in credit repair is to obtain a credit report from the three largest credit purveyors, Equifax, Experian and TransUnion. You might be surprised to learn that your credit information may differ between credit agencies. The reason is due to the relation that each credit agency has with it's subscribers. For example, a mortgage company may only report a person's payment history to one credit agency and not to the other credit agencies. Because credit reporting is not uniform, credit repair companies obtain a credit report from each credit reporting company.

With the credit reports in hand, the credit repair companies will review the credit report in detail with the client. The credit company's representative will search out duplicate entries on the credit report, look for incorrect credit listings and other inaccuracies. After identifying any incorrect information, the credit repair company will submit letters to the credit agency and the creditor of the error(s). The Fair Credit Reporting Act (FCRA) requires credit agencies to verify the accuracy of any disputed information with the creditor. The creditor has 30 days to acknowledge whether the disputed account is accurate. If the creditor fails to report back to the credit agency within the 30-day period, the credit reporting must remove the disputed listing.

Some credit repair companies will dispute all negative items on a credit report, irrespective of whether the negative items are accurate or not. Since the credit bureau(s) has 30 days to investigate the request, this random dispute method can temporarily generate positive results. During the course of the inquiry, the disputed items will not be included in a credit score. A comment will appear under each disputed item. If the creditor fails to respond with proof that the item is accurate, the credit bureau will remove it. Mailing repetitive letters to the credit bureaus is called "jamming".

Now don't get excited. Deliberately disputing accurate credit listings is an illegal misuse of the process.

What is file segregation?

File segregation is where you obtain an Employer Identification Number (EIN) from the Internal Revenue Service. Once you have the EIN, you can establish a new credit history. If this tactic seems fishy, it is. This practice is against the law. Don't do it.

How much do credit repair companies charge?

The amount you’ll pay and how it’s calculated will vary depending on the company.

You might pay a one-time flat fee, or pay for each derogatory mark the company removes from each of your reports. The cost may start around $35 per deletion and could range to $750 or more.

Some companies charge by the month, ranging from $50 to $130 or more. There are setup fees or a fee for accessing your credit reports.

And then there's the companies that charge a subscription service. We all like this payment arrangement, don't we. These companies charge your credit card at the end of the month for services performed during the previous month. Subscriptions for credit repair generally fall somewhere between $50 and $100 per month.

And finally, there's the "pay per delete." With pay per delete, the credit repair company only charges you when an item on your credit report is actually deleted due to their efforts.

Now here's the good news, credit repair companies can’t request or receive payment until they deliver the promised results according to the Credit Repair Organizations Act (CROA) 

Should I use a credit repair company?

Before you sign a contract with a credit repair company, why not make an effort to repair your credit report yourself? You might be thinking, "where do I start". Read
How to fix my credit score.