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Credit Repair Scams Could Lead You to Trouble Advertisements
mailed to consumers and on the Internet, radio, and TV claim that
for a small fee you can legally leave behind your credit problems--even
a bankruptcy. With lots of language about the "legal forms
from the federal government" and your one-time "right"
to apply for a "new Social Security number" these advertisements
try hard to convince you that their system, called "file segregation,"
is the secret to a fresh start with credit. File
Segregation Creates a False Identity Once you have this "new" number, the credit repair service will tell you to use it in place of your Social Security number on credit applications. They may also instruct you to use a new mailing address and offer some credit references. They explain that because your credit file is tied to your name and Social Security number, using this new number and information allows you to create a brand new credit file. Credit-grantors requesting a credit report with your name and new number will never see your previous file with all the negative information it contains. The credit repair service will most likely offer very reasonable and legitimate sounding cautions. They'll remind you that to make this clean slate count, you have to pay your bills on time from now on. They'll also tell you it will take 60-90 days before your new credit rating really begins to work for you, since, after all, you're starting from scratch. Segregating
Your File Violates the Law Several aspects of the credit repair service's program could lead you to commit fraud. It is a federal crime to: Make
false statements on a loan or credit application. "Repair"
Your Own Credit by Handling it Well That's a lie, too. Certainly, a poor credit history will impact your ability to obtain new credit, but there are many options available for people who are ready to begin rebuilding their own, legal credit file. Many major banks now offer secured cards, for example, that allow a person with poor credit to begin establishing a track record of bills paid on time. And after just a couple of years, many people who have filed for bankruptcy find that some lenders are willing to consider them for small loans, allowing them to start over without falsifying their identity or applications. Ultimately,
the same rule applies to file segregation as to any other kind of
"credit repair" system: There's nothing anyone out there
can legally do to improve your credit rating that you can't do yourself
for free. No matter what the ad states, a poor credit history can’t be erased...but there are some things you can do. Under the Fair Credit Reporting Act, you can question an item in your credit file and your complaint must be investigated. However, the negative information will be removed only if an investigation determines it’s incorrect. A credit repair company, no matters what it claims, cannot compel the credit bureau to remove negative information from your file, if that information is accurate. Some companies claim they will work with your creditors to consolidate your debts, or reduce the size of your monthly payments. Before you pay large sums of money to these companies, call our office for referral to non-profit counseling services that provide free or low-cost help. New ID Is a Bad IDea - 'File Segregation' If you have filed for bankruptcy, you may be the target of a credit repair scheme called "file segregation." In this scheme, you are promised a chance to hide unfavorable credit information by establishing a new credit identity. That may sound perfect, especially if you’re afraid that you won’t get any credit as long as bankruptcy appears on your credit record. The problem: "File segregation" is illegal. If you use it, you could face fines or even a prison sentence. The Pitch: A New Credit Identity If you have filed for bankruptcy, you may receive a letter from a credit repair company that warns you about your inability to get credit cards, personal loans, or any other types of credit for 10 years. For a fee, the company promises to help you hide your bankruptcy and establish a new credit identity to use when you apply for credit. These companies also make pitches in classified ads, on radio and TV, and even over the Internet. If you pay the fee and sign up for the service, you may be directed to apply for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). Typically, EINs — which resemble Social Security numbers — are used by businesses to report financial information to the IRS and the Social Security Administration. After you receive your EIN, the credit repair service will tell you to use it in place of your Social Security number when you apply for credit. They’ll also tell you to use a new mailing address and some credit references. The Catch: False Claims To convince you to establish a new credit identity, the credit repair service is likely to make a variety of false claims. Listen carefully; these false claims, along with the pitch for getting a new credit identity, should alert you to the possibility of fraud. You’ll probably hear: Claim
1: You will not be able to get credit for 10 years (the period of
time bankruptcy information may stay on your credit record). Claim
2: The company or "file segregation" program is affiliated
with the federal government. Claim
3: The "file segregation" program is legal. Rights Under The Credit Repair Organizations Act This law prohibits false claims about credit repair and makes it illegal for these operations to charge you until they have performed their services. It requires these companies to tell you about your legal rights. Credit repair companies must provide this in a written contract that also spells out just what services are to be performed, how long it will take to achieve results, the total cost, and any guarantees that are offered. Under the law, these contracts also must explain that consumers have three days to cancel at no charge. Under the law, you also have the right to sue in federal court. The law allows you to seek either your actual losses or the amount you paid the company — whichever is more. You also can seek "punitive" damages: sums of money to punish the company for violating the law. The law also allows class actions in federal court: cases where groups of consumers join together in one lawsuit. If you win, the other side has to pay your attorney’s fees. Many states have laws regulating credit repair companies, and may be helpful if you’ve lost money to credit repair scams. If you’ve had a problem with a credit repair company, report the company. Contact your local consumer affairs office or your state attorney general (AG). Many AGs have toll-free consumer hotlines. Check with your local directory assistance. You also
may wish to contact the FTC. Although the Commission cannot resolve
individual credit problems for consumers, it can act against a company
if it sees a pattern of possible law violations. If you believe
a company has engaged in credit fraud, you can file a complaint
online, or send your complaint to: Consumer Response Center, Federal
Trade Commission, Washington, D.C. 20580. |
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