Consumer law regulates credit repair services to prevent scams
Consumers who have mounting debts have several alternatives to filing bankruptcy. They can negotiate a settlement with a lender, sell a property to stave off a foreclosure or repossession or they can seek the help of a credit counseling program.
However, one consequence of debt problems is the badly damaged credit rating that is left behind. People trying to repair their credit can take steps to do it themselves or they can hire an organization for a fee.
As with any professional who provides a service, people should choose a credit repair agency with care. The Credit Repair Organizations Act (CROA) was passed in 1996 to ensure that consumers seeking help with credit problems are protected legally.
Under the Consumer Credit Protection Act, the law provides that credit repair must be offered in a written contract with a detailed description of the organization's program and the timeframe in which it will perform services. It also gives consumers up to five years to sue a credit repair program to recoup their costs if the CROA is violated.
According to the regulation, credit repair agencies aren't allowed to advise consumers to lie about their damaged rating to current or future lenders and cannot alter a person's identity to obtain new credit. They also cannot misrepresent their services or ask for payment before their counseling has been provided.
If consumers are convinced that hiring a credit repair organization is their best alternative, they should be aware of popular scams that some services have tried.
Gail Cunningham of the Maryland-based National Foundation for Credit Counseling told Bankrate that one common scheme involves substituting a client's social security number with a new one, which falls under CROA's provision on identity alterations. She said some services have swamped credit bureaus with claims that dispute a consumer's record in order to remove damaging information just long enough to obtain a new credit card or favorable loan terms without revealing the true circumstances of the person's credit history.
Some financial experts doubt whether credit repair services are necessary. "The money you are spending for credit repair would be better used to pay off some of your old debt," columnist Steve Bucci writes on Bankrate."Many services provided by the credit repair company are things you could have done yourself for free."
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