How you can tell if a credit repair company is operating illegally

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Credit repair organizations provide a valuable service to consumers, helping to increase credit scores by holding credit bureaus, banks, debt collectors, and lenders accountable for reporting accurate information. However, like with any financial service, it’s important for consumers to know their rights and make sure the credit repair company they hire is following all laws and regulations.

So what’s the most important thing to look for when dealing with credit repair companies and looking for the best option?

To narrow it down to one rule of thumb, you’ll want to avoid credit repair services (or any financial services!) that charge up-front fees. Taking a consumers money before any services have been provided is point-blank illegal according to the Credit Repair Organizations Act (CROA), a Federal statute that sets regulations for compliance in the financial industry.

The CROA prohibits advanced billing – or up-front fees and charges – for work not yet performed. So if a credit repair company approaches you with a big bill before any work or services have been rendered, it should raise a big red flag with you, as they are breaking the law.

But despite the shaky reputation for the credit restoration industry as a whole, there are some great companies (present company included, we hope!) that rare in full compliance with the CROA and all other laws, working hard to ensure consumers can raise their scores.

So how can you tell the “bad guys” from the “good guys” when it comes to credit repair? The root of it all is how they plan on charging you for their services, so sit down with their proposed agreement (before you sign!) and take a hard look at how they plan on billing you.

If your credit repair company is in compliance and operating legally, they will probably charge you in one of these two ways (many credit repair companies will let their clients choose which way they’d like to be billed);

1. Subscription-based credit repair plans charge per month (or periodically) only after services have been provided,
2. They utilize a pay-for-performance structure where they’ll only charge you once they get an item removed or corrected on your credit report.

Let’s cover the fine print, as well as the pros and cons of each:

Subscription-based credit repair services:
Using this method, a credit repair company will charge their clients every month for services rendered during that previous 30 days. That way, the consumer knows they are only charged if and when services have been rendered.

While the amount of the monthly subscription will vary, to comply with the CROA’s advance fee payment provision the client must receive a disclosure from the company beforehand. This disclosure will detail what the client is getting in terms of services for the monthly payment, as well as document what the company did to perform those services to completion.

Be prepared that credit repair companies frequently do charge an initial fee – called an initial audit or discovery fee – for the time consuming initial work when they start a consumer’s credit repair file. But those charges need to be clearly documented, too, and there should never be billing surprises if the contract is clear and in compliance.

Pay-for-Performance credit repair services:
Pay-for-Performance models, also called Pay-for-Delete or PPD, is a method of billing that mandates a company can only charge a consumer once they were successful with what they promised – removing or correcting negative items on the credit report.

While it may seem like the best and simplest method of billing on face value, it may cost the consumer much more in the long run. PPD billing companies have a lot of work to do before they get paid, and therefore they’re incentivized to start with the easiest credit repair tasks – not necessarily the most impactful or positive for the consumer. They also will most likely charge per item that is corrected or deleted, and since there are three major credit bureaus, consumers may be seeing triple once the bill arrives for fixing one account. So if the credit repair company successfully repaired 5 items on your credit report, that means you’ll have 15 charges to pay. Ouch!

For that reason, pay-for-performance credit reporting services aren’t necessarily better or less expensive than subscription models.

What to look for in a credit repair agreement
No matter which payment structure you choose, there are certain things to look for to ensure your credit repair company is legitimate.

You should receive a copy of the “Consumer Credit File Rights Under State and Federal Law” guide, which outlines your rights to obtain a credit report and dispute inaccurate information.

A credit repair company must also disclose what services you can perform on your own.

You should be given a copy of your contract or agreement BEFORE you’re urged to sign it.

The contract must contain the following information:
• The amount you are being charged
• Details about the services being performed on your behalf
• The date by which the services will be performed (or the time period required to perform the services)
• The name and business address of the credit repair organization actually doing the work
• A statement letting you know you can cancel the contract within three days

What is NOT legal
Be extremely wary of false promises and over-aggressive salespeople. It’s illegal for companies to advertise something they can’t promise, like “Increase your score by 100 points, guaranteed,” “Everyone qualifies for a mortgage,” or “No Credit, No Problem.”

Any legal and ethical credit repair agency should adhere to all CROA regulations and industry best practices.

They should also never offer to remove items from your credit report that are accurate or promise to remove items by claiming identity theft or credit card fraud, etc.

Any company that asks you to pay for them to manufacture new positive tradelines is operating illegally.

That’s the case of any company that asks you to create a new identity with a new social security number or EIN, etc.

If they promise something verbally, make sure it’s in writing in the contract. Ask plenty of questions and get the answers in writing. Do your due diligence before you sign any contract with anyone!

What to do
The aforementioned Credit Repair Organizations Act (CROA) dictates regulations for the credit repair industry, but it’s up to the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) to enforce the laws, identifying and punishing companies that aren’t in compliance.

So if you feel you’ve been “taken” by a credit repair company that’s not living up to the promises they made or operating within the law, start documenting everything including all timelines and correspondence. Ask your hard questions via email or ask for all answers in writing.

Review the contract and ask them to clarify any ambiguity in writing, including the services they performed and justification for the charges you’ve incurred.

If you still don’t get resolution and think you’re dealing with an illegal credit repair company, contact your state attorney general and the Federal Trade Commission, the Better Business Bureau, and the Consumer Financial Protection Bureau. If large sums of money are involved or you’re worried about fraud, theft, or ongoing illegal activity, you may want to consult an attorney.

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Blue Water Credit is the industry leader in legal and ethical credit repair, and proud to ALWAYS be in compliance with all laws and Credit Repair Organizations Act stipulations. If you have any questions about credit repair or even want us to look at your contract from another company, feel free to contact us.

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