Are Credit Repair Companies A Scam? How To Protect Your Credit

From fake job offers and lottery prizes to fraudsters pretending to be from your bank or the government, scams are everywhere. According to a recent Gallup survey, more than half of Americans (57 percent) worry about falling victim to one. If you’re working on fixing your credit, you may wonder if the credit repair offers you see are legitimate. 

The good news is that many reputable credit repair companies do what they promise. Unfortunately, there are also some dishonest companies out there. Learning how legitimate credit repair companies operate can help you spot scams and protect yourself from fraudsters. 

How legitimate credit repair companies work

Legitimate credit repair companies help consumers find and fix the errors in their credit reports. These errors are relatively common: In a recent Consumer Reports study, 44 percent of people had errors in their credit reports. About a quarter of those errors (27 percent) were serious enough to potentially harm their credit scores.

Legitimate companies start the credit repair process by requesting a copy of your credit report from the major credit bureaus (Equifax, Experian and TransUnion). Then, the credit repair company checks the report for potential errors, like an account that belongs to someone else or an old collection account that should have fallen off your report. If there are errors, the company files disputes with the credit bureaus to get the information corrected.

Reputable credit repair companies don’t have special powers. You’re allowed to take the same actions on your own. You can get free copies of your credit reports from AnnualCreditReport.com to check for errors, and you can file disputes with the three major credit bureaus for free.

Common types of credit repair scams

Scam credit repair companies take advantage of people who want to improve their credit, potentially leaving them worse off than when they started. Protect yourself by learning about some of the most common credit repair scams.

Advance payment scams

Advance payment scams are a common type of fraud where people are conned into paying for non-existent services. The scam credit repair company convinces a customer to pay upfront for credit repair services — then does not deliver the promised services.

Scammers may request the upfront fee in unusual payment methods, like retail gift cards, wire transfers or cryptocurrency. These methods are popular with fraudsters because they’re hard to trace and almost impossible to refund. 

Credit washing

Credit washing is a type of fraud that involves hiding information on a credit report by filing false claims of identity theft. Predatory credit repair companies use this tactic to get accurate but negative items removed from a person’s credit file, at least temporarily.

This scam takes advantage of the consumer protections offered to real victims of identity theft. According to the Consumer Financial Protection Bureau, credit bureaus must block identity theft-related debts from consumers’ credit reports.

File segregation

File segregation is a scam that involves creating a fraudulent credit file to replace the consumer’s real credit file. The predatory company provides a Credit Privacy Number (CPN) for the consumer to use in place of their Social Security number (SSN), claiming it’s a way to “start fresh.”

Unfortunately, a CPN isn’t a legitimate way to fix credit problems. Using a CPN instead of an SSN on a credit application is illegal and considered fraud. It could also involve you in identity theft since the CPN may be someone else’s stolen SSN.

Tradeline renting

Tradeline renting, also known as credit piggybacking, involves paying to become an authorized user on a stranger’s credit card account without access to the card. Some credit repair companies promote this scheme as a way to benefit from another person’s good credit score.

The Federal Trade Commission has taken action against credit repair companies that engage in credit piggybacking, and Experian warns that lenders and credit bureaus consider the practice deceptive. 

Authorized users: Being an authorized user on someone’s credit card is a good way to help build your credit. You don’t even need to 

How to spot a credit repair scam

Credit repair companies are required to follow the Credit Repair Organizations Act (CROA). The CROA is a federal consumer protection law that sets guidelines for credit repair companies and offers consumers certain rights. Not following CROA rules is a red flag that the company may be fraudulent.

You’ll know a credit repair service is violating the CROA if the company:

• Asks you not to contact the credit bureaus: You have a right to contact the credit bureaus directly.
• Demands upfront payment: Credit repair organizations are not allowed to charge for any service that hasn’t been fully performed.
• Doesn’t give you a contract: Under the CROA, credit repair companies can’t provide services unless you sign a written contract.
• Doesn’t explain your rights: You should receive a written statement that outlines your credit repair rights under state and federal law.
• Promises to remove negative but accurate information: As long as the facts are correct, the credit bureaus will continue reporting negative information until it falls off your credit report.
• Recommends entering false information on applications: Entering false information, like a CPN, is considered fraud, and the CROA forbids companies from engaging in fraudulent activity.
• Suggests that you alter your identity: Changing your identity as a way to modify your credit history is also considered fraud.
• Tells you to mislead the credit bureaus: Misleading the credit bureaus could include actions like disputing negative information that you know is true. 

What to do if you encounter a scam

Anytime you come across a credit repair service that seems like a scam, avoid it and choose a more reputable company. If you think you’ve been scammed, you can take steps to protect yourself and others, such as canceling the contract or filing complaints.

Try to cancel the contract

If you’ve already signed a contract with a credit repair company you suspect is trying to scam you, you may be able to back out of the deal. Under the CROA, consumers have certain cancellation rights.

Within three business days from the date you signed a contract, you have the right to cancel for any reason, with no penalty or obligation. Each credit repair contract must include a “notice of cancellation” form for customers who change their minds.

File a complaint with your state’s attorney general

Attorneys general are responsible for enforcing consumer protection laws in their state. If you’ve been scammed by a company offering credit repair services, consider filing a complaint with your state’s attorney general.

Attorney general offices have the authority to take action against predatory credit repair companies. Filing a complaint helps them build a case against scammers and take actions such as fining the company or even shutting it down.

Report the scam to the Federal Trade Commission

The Federal Trade Commission (FTC) is a government agency that works to protect Americans from unfair business practices, including scams and fraud. If you have problems with a predatory credit repair company, you can file a report with the FTC.

While the FTC won’t respond to your report individually, it’s still worth taking the time to complain. The FTC and other law enforcement agencies can use your report to build a case against companies that break the law. 

The bottom line

If your credit score isn’t where you’d like it to be, cleaning up errors on your credit report could help you improve it. You can do this on your own or with the help of a credit repair company. 

If you choose to hire a credit repair company, there are plenty of reputable options available. However, it’s important to be vigilant and watch out for the potential signs of a credit repair scam. 

Frequently asked questions

• Is it worth paying someone to fix your credit?
  

  Anything a credit repair company can legally do, you can do on your own. Whether hiring a company to clean up your credit report makes sense depends on your needs and budget.

  It could be worth paying someone to fix your credit if you’re dealing with the fallout of identity theft or other complex credit report issues. Outsourcing the job could also make sense if you’re too busy to clean up your credit report alone or you find the credit repair process complex or overwhelming.

• How can I choose a reputable credit repair company?
  

  If you’re interested in hiring a credit repair company, choose a company that follows the law. Under the CROA, credit repair companies cannot charge upfront fees or suggest misleading the credit bureaus.

  When vetting credit repair companies, it’s also helpful to see what other customers think of the service. Try searching the Consumer Financial Protection Bureau’s (CFPB) database for complaints or reading company reviews.

• Can you wipe your credit report and start fresh?
  

  Despite what some dishonest companies claim, it’s not possible to reset your credit history. However, negative information doesn’t stay on your credit report forever. No matter how low your score is, it’s possible to rebuild your credit over time.

  Late payments, accounts in collections, foreclosures and Chapter 13 bankruptcies fall off your report after seven years. Chapter 7 bankruptcies stay on your report for 10 years. If negative information is still showing on your report after it should have expired, you can file a dispute with the credit bureaus.