Avoiding Credit Repair Scams

Learn how to spot fraudulent credit repair companies.

Under today's tight lending standards, excellent credit is vital for getting a loan with the best interest rates and terms. No wonder so many prospective homebuyers are looking for ways to clean up their credit.  Unfortunately, some unscrupulous companies are taking advantage of consumers during the current credit crisis.

Credit repair companies often advertise on the radio, on television, in newspapers and on the Internet, claiming to be able to improve your credit record, usually for a hefty fee. Many of these companies are scams and will do you more harm than good.

Before you do business with a credit repair company, check them out at the Better Business Bureau. In general, beware of credit repair companies that:

  • Ask you to pay for services upfront.
  • Recommend that you don't contact a credit bureau directly.
  • Don't tell you your legal rights. By law, credit repair companies are required to give you a copy of your consumer rights, a detailed written contract and three business days to cancel the contract from when it was signed.
  • Promise to erase all of the negative information on your credit history. If the derogatory information is accurate and timely, only the creditor who reported it can remove it. Credit repair companies that offer to wipe your credit history clean are actually disputing all of the negative information on your report. Credit reporting bureaus must investigate these disputes within 30 days. If they verify that the information is correct, it stays on your report; if not, the information is removed. But while the information is being disputed, it's temporarily removed from your credit history, making your history look spotless even if it's not.
  • Offer you a new social security number. The Social Security Administration hardly ever gives out new social security numbers, even to people who have had their numbers stolen. What the credit repair company is actually doing is filing a new EIN, a nine-digit employer identification number used to identify companies to the IRS. This practice is called "file segregation" and is illegal -- you might be accused of committing bank fraud if you use an EIN on a loan application.

Instead of turning to fishy credit repair companies, there are several things you can do on your own to improve your credit that are more effective and much easier on your wallet. Take these steps toward getting your credit in shape:

  • Contact credit bureaus. You can request a free credit report once every 12 months from AnnualCreditReport.com. Inspect your report for errors, such as incorrect balances and accounts you don't recognize. Correcting these errors should boost your score immediately.
  • Add an explanation to your report. If you had a good reason for not paying your bills on time, such as a job loss or a legitimate dispute, you can send the credit bureau a 100-word statement to include in your file.
  • Get credit counseling. Get in touch with Consumer Credit Counseling Services, a non-profit organization that offers personal finance education and credit counseling for free or at a low cost.
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