What Are Credit Repair Scams and How Do They Work?

Credit repair scams are becoming more popular because many unsuspecting citizens want a fast way to obtain good credit.

A credit repair scam is when an organization promises to give someone with bad credit a “fresh start.” In exchange for an upfront fee, they tell you that all of the bad data shown on your credit report will disappear.

Types of Credit Repair Scams

The New Identity Promise

One way fraudulent companies might try to give you a new identity is by asking you to apply for an Employer Identification Number (EIN). The Internal Revenue Service (IRS) generates EINs for businesses, not to replace Social Security numbers.

The IRS still needs to know who is responsible for the EIN. Even at tax time, there isn’t a legal way to avoid divulging your Social Security number.

When a company offers to provide you with a new Social Security number or any other identifying number to wipe away bad credit, it’s a scam. Furthermore, using another person’s Social Security number is illegal.

Some companies are aware that individuals know about EINs, so they’ll ask you to use a credit privacy number (CPN). They may say it’s a credit profile number. The series of numbers are formatted to resemble a Social Security number to fool agencies.

There are serious consequences of dealing with these scam organizations. Providing misleading information when applying for a loan could cost you your freedom for a period and money if fines are imposed. The dishonest act is called identity theft.

Federal law prohibits:

  • Lying on a loan application
  • Providing false information when applying for credit
  • Applying for an EIN for the purpose of deceptive activity

The Lie About Erasing Every Negative Credit Score and Related Data

A scam credit repair company may promise to banish all negative marks from your credit report. Even if you know it is accurate, they will advise you to challenge the report.

The fact is credit reporting agencies will thoroughly research your dispute. They will not remove any negative mark that they cannot prove is false just based on your challenge.

The False Claim of Stating By How Many Points Your Credit Will Increase

No one can tell you specifically how many points your credit will change. That’s because every situation is unique.

Credit repair scams may give you a “too good to be true” figure to convince you that they can deliver more than anyone else.

It’s a scam because not even a legitimate financial counselor can predict how much your credit score will improve.

Red Flags to Look Out For

Requesting that you pay an upfront fee or make monthly payments

Many credit repair scam organizations are fully aware of the laws regarding upfront payments. To work around asking for all of the fees upfront, the scammer may ask you to make monthly payments.

Both requests are illegal.

In 1996, Section 401 was made into law. It is The Credit Repair Organizations Act (CROA) which states that it is unlawful for a credit repair company to request or accept any form of payment until all services have been performed as promised.

Not explaining your credit rights

The Federal Trade Commission (FTC) enforces this law which states that credit repair companies must put in writing the following:

  • The specific services they promise to deliver
  • The total price you will pay
  • Guarantees, if any
  • That you have three days to void the agreement without being charged a cancellation fee or any other fee
  • The time frame in which you will see results from their services

Advising You Not to Directly Communicate with Credit Reporting Agencies

Any credit repair company that recommends you don’t contact any nationwide credit reporting agency is probably a scam.

Matter of fact, a good way to get the most recent data about your credit report is to contact the credit reporting bureaus who regularly collects financial data.

Summary & Specific Resources

Credit repair scams are on the rise, but you don’t have to be a victim.

To earn a good credit report, pay down your past due debts until they are eliminated. In time, you’ll pay off bad debt and good credit will follow. Keep paying your current bills on time to maintain good credit. 

Contact the state attorney general if you think you’ve been misled by a deceitful credit repair agency.

Note: if there are any grievances against the business you’ve dealt with. You can do this for any agency prior to working with them to avoid being scammed in the future.

To make a complaint, report the incident to the Federal Trade Commission (FTC).

Submit a complaint to the Consumer Financial Protection Bureau (CFPB) as well.

Understanding your credit scores is important whether they are good, bad, or in-between. Financial experts at 121 Financial Credit Union offer free financial counseling to every member.

We can help you understand the facts about:

  • Repaying debts
  • Credit reports
  • How to improve your credit score
  • Managing money
  • And so much more!

Our GreenPath Financial Wellness financial counseling service is virtual for your convenience. Experience the value of the complementary benefits of your membership. Join today!

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