Spotting credit repair scams: the FTC's red flags and your CROA rights

The single most useful fact about credit repair companies is a payment rule. Under the Credit Repair Organizations Act, a credit repair company “may not charge or receive any money or other valuable consideration” for a service “before such service is fully performed” (15 U.S.C. 1679b(b)). A company that wants a setup fee, a first-work fee or a month paid in advance before anything has happened is telling you how it plans to treat the rest of the law.

If you’ve already paid one of these companies and have little to show for it, you weren’t naive. The pitch is designed for people who’ve been told no by a lender and want someone to just handle it. If you’ve already signed, skip to the last section: it covers cancelling, getting money back and where to report.

The FTC’s warning signs, and why each one matters

The FTC lists these as signs of a credit repair scam. Each one maps to a legal or practical problem.

• “Pay us before we help you.” Advance fees are banned by CROA. A company that collects them has an incentive to do as little as possible afterward.
• “Don’t contact the credit bureaus yourself.” You have a right to dispute directly, for free. A company that wants to be your only channel keeps you from seeing that the disputes it sends are the same ones you could send.
• “Dispute everything, even the accurate items.” Disputing accurate information usually just gets it verified and left in place, after a month of waiting. Before a mortgage, open disputes can stall underwriting; see what not to dispute.
• “Leave that off your loan application.” The FTC flags companies that tell you to lie on credit or loan applications. Lying to a lender can turn a credit problem into a legal one.
• “File an identity theft report.” Filing a false identity theft report to get accurate accounts blocked is one of the specific tactics the FTC warns about. The bureau can reinstate the information if the block was based on a misrepresentation.
• No explanation of your rights. The FTC says a credit repair company has to explain your rights in writing, including your right to cancel. A company that skips that step is skipping the law.

The FTC adds one more: a company that promises to “create a new credit identity” or hide bad credit or a bankruptcy. The FTC says these schemes often use stolen Social Security numbers or EINs obtained from the IRS under false pretenses, and that using a number other than your own to apply for credit could bring fines or prison. That’s the CPN pitch, covered in why credit privacy numbers are a trap.

What a legal credit repair contract has to say

CROA sets out what must be in writing before any work starts. A company can’t provide services until you’ve signed a written, dated contract and the three-business-day cancellation window has passed, and that contract must include the items below (15 U.S.C. 1679d).

The company must also give you a separate “Notice of Cancellation” form, in duplicate, that you can sign and send back (15 U.S.C. 1679e). The statute bans false or misleading statements about what the company can do, and bans advising you to change your identification to hide accurate negative history (15 U.S.C. 1679b(a)).

What the monthly fees add up to

Credit repair is often sold as a monthly subscription with no set end date. Before you sign anything, multiply it out.

Example: say a company quotes a $129 “first work fee” plus $99 a month, and you stay enrolled for eight months.

• Monthly fees: $99 x 8 = $792
• Plus the first-work fee: $792 + $129 = $921

That $921 buys dispute letters you could write and mail yourself. Your reports are free every week at AnnualCreditReport.com. Online disputes with the bureaus are free. Certified mail costs postage. The one thing the company can’t buy for you is the removal of accurate, current information, because no one can legally do that.

And look again at the $129 first-work fee in the example. If it’s collected before the work is fully performed, it’s the kind of advance charge CROA prohibits.

Doing it yourself, for free

Every legitimate step a credit repair company takes is open to you:

• Pull your reports and read each account line by line.
• Dispute information that’s inaccurate, incomplete or can’t be verified, with the bureau and with the company that furnished it. The steps are in how to dispute a credit report error.
• Write a goodwill letter asking a creditor to reconsider a late payment.
• Negotiate with a collector, in writing, before paying anything.

What you can’t do, and what no company can do legally, is erase accurate history early, invent a new identity, or get a “609 letter” to work as a magic removal tool. The reasons that last one fails are in the truth about 609 letters. A fuller side-by-side is in credit repair companies vs. doing it yourself.

If you’ve already signed or paid

1. Check the calendar. If you signed within the last three business days, cancel now. The deadline is midnight of the third business day after the contract was signed or became enforceable. Use the Notice of Cancellation form, send it in a way you can prove, and keep a copy.
2. Pull the contract. Compare it to the table above. Missing items, a missing cancellation notice, or fees charged before the work was done are all violations worth writing down.
3. Stop future payments. Revoke any card or bank authorization you gave the company, in writing, and tell your bank or card issuer.
4. Ask for a refund in writing. Quote 15 U.S.C. 1679b(b) if they charged in advance.
5. Report it. File with the FTC at ReportFraud.ftc.gov, with your state attorney general or consumer protection office, and with the CFPB.
6. Know your legal remedy. Under 15 U.S.C. 1679g, a company that violates CROA is liable for the greater of your actual damages or the amount you paid it, plus any punitive damages the court allows and reasonable attorney fees if you win. A consumer attorney can tell you whether your case qualifies.
7. Check what was disputed in your name. Pull your reports and look for dispute notations or accounts the company may have challenged. If any of those disputes were for accurate items, don’t keep them open before a big application.