Regulation of credit repair companies poses a particular challenge to the governmental agency in charge of consumer protection--the Federal Trade Commission (FTC). In 2006, the FTC, the U.S. Postal Inspection Service and law enforcement agencies in eight states initiated a crackdown on credit repair companies that asserted they could remove accurate negative information in consumers' credit reports in a sting called "Project Credit Despair." According to the FTC, consumers paid hundreds and even thousands of dollars to credit repair companies only to end up with the same credit reports they had before. Credit repair companies offer a variety of quick fixes to consumers, but the FTC notes that the only way to improve credit reports is through time, effort and making good to creditors through a personal debt repayment plan.
Allure
Credit repair companies work by offering an array of enticements to consumers with poor credit histories. One promise a company may make is that it can have bankruptcies, judgments, liens and bad loans erased from any credit report. Others claim they will fix bad credit "100 percent guaranteed." Some go even further and provide consumers a new credit identity that does not reflect past bad debt. Credit repair companies claim that consumers can then get a loan for a car or home or even gain employment.
Procedure
The financial experts at Credit.com state that the typical procedure used by a credit repair company is to request that the consumer supply his credit reports from Equifax, Experian and TransUnion, the three major credit reporting agencies. The credit repair company advises the consumer which negative information should be disputed and then contacts the reporting agency to challenge these items, regardless of their veracity. However, if the information on the credit reports is accurate and timely, it will not be removed.
Illegal Tactics
Credit repair companies may advise consumers to get a fresh start through an illegal process called file segregation. This requires the consumer to apply for an employer identification number (EIN) through the Internal Revenue Service (IRS). The EIN is then used in place of the consumer's Social Security number whenever he applies for new lines of credit. Consumers may also be encouraged to use a slightly different name and address to shield their true identity from creditors. Credit.com notes that it's a federal crime to get an EIN for these purposes. Additionally, many credit repair companies ask consumers to pay for services before they are rendered, which is in violation of the Credit Repair Organizations Act of 1996. According to Credit.com, credit repair companies cannot collect a fee until they have provided the services they promise to deliver.
Results
In short, the majority of companies that promise to repair credit simply don't work, leaving consumers in the same situation they were before, only a little lighter in the wallet. The FTC points out that if there is erroneous information contained in a credit report, consumers can easily rectify this themselves without paying a fee to a credit repair company or similar service provider (see Resources). But the only remedy for accurate negative credit information is time: 7 years in most cases or 10 years if bankruptcy is reported.
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