Consumer Credit Resource
Recent developments in consumer credit
FTC Amends "Free Credit Reports" Rule
FTC and credit bureaus testify before congressional subcommittee
A Brief Primer on Credit Reports,
Credit Scores, and Credit Repair
Credit Reports. Companies called credit reporting agencies (CRA’s) maintain credit files on consumers. There are three primary national CRA’s – TransUnion, Equifax, and Experian – along with several other national and regional CRA’s. If you apply for or use credit, such as credit cards, home and automobile loans, or if you otherwise receive products or services with an agreement to pay at a later time, the creditor has a right to report your credit usage to one or more of the CRA’s. The information reported can include aspects such as credit limits, current balances, repayment terms, payment history, delinquencies, foreclosures, charge-offs, and collections. Your credit file also can contain information from public records, such as judgments, convictions, and bankruptcies. Other, generally neutral, information in your credit file may include current and previous residences, birth date, social security number, and employment. Your credit file does not contain a credit score.
Credit Scores. Credit scores are numerical indicators of your credit risk – they are used to predict how likely you are to default on a loan. Several companies have developed computer models to generate scores from the information contained in your credit files. In the home loan industry, the most commonly used credit scoring model is one developed by Fair Isaac and commonly referred to as the FICO score. If you apply for a home loan, the lender typically will obtain a credit report that has information combined from your credit files at the three main CRA’s – commonly called a tri-merge report. Along with that, the lender orders your FICO scores from each CRA. Note that you will have three different FICO scores, since the information in your file at each CRA differs at least slightly (some creditors may report only to one or two of the three CRA’s). The lender typically bases its underwriting decision, in part, on the middle score; for example, if you have FICOs of 580, 600, and 620, the lender will use the mid-score of 600. Keep in mind that if you purchase credit scores directly from a CRA or from some other non-FICO source, you likely may receive a score generated by a non-FICO scoring model that uses a different scoring range. Thus, you could be in for an unpleasant surprise when you take your 720+ score to a lender, only to have them tell you that your mid-point FICO actually is far lower.
Credit Repair. Credit repair generally is the process of providing education, guidance, and services to a consumer, with the goal of improving the consumer’s credit profile with the credit reporting agencies. Of course, an improved credit profile will, in most cases, translate into an improved credit score. The services component of credit repair will vary from company to company, but may include some or all of the following:
1. Analyzing the consumer’s credit reports to identify inaccurate, obsolete, and unverifiable information;
2. Analyzing the consumer’s credit reports to identify opportunities to modify the mix of different types of credit being utilized and the extent of utilization;
3. Preparing and transmitting dispute letters to the credit reporting agencies challenging inaccurate, obsolete, and unverifiable information;
4. Preparing and transmitting validation letters to debt collectors that have reported negative information to the credit reporting agencies;
5. Providing education and guidance to the consumer on items such as budgeting, establishing positive credit accounts, and dealing with collection agencies; and,
6. Negotiating directly with creditors and collectors to delete derogatory information from the consumer’s credit files.
Is Credit Repair Legal? Yes, if conducted in compliance with applicable laws. To listen to the FTC and the credit reporting agencies, you might conclude that all credit repair companies are scams and that they cannot do anything to help you improve your credit rating. A look at the motives for each helps in understanding why credit repair gets a bad rap. The FTC’s motivation is an honorable one. Historically, there have been many fraudulent credit repair companies that would make deceptive promises, take the consumer’s money, and then disappear without doing anything for the consumer. The CRA’s motivation, on the other hand, is financial. They dislike credit repair companies because consumer disputes that come from credit repair companies force the CRA’s to perform the information verification that is mandated by the Fair Credit Reporting Act. This costs CRA’s time and money.
Ironically, the latest figures from the FTC show that of all consumer complaints lodged with the FTC in 2009, 2.38% (31,629 out of 1,330,426) were lodged against Credit Bureaus, Information Furnishers and Report Users. By contrast, only .17% (2,299 out of 1,330,426) were against credit repair companies. Consumer skepticism can be a good thing, but it should be based on facts rather than self-interested propaganda.
The simple truth is that credit repair companies are legal, as long as they operate in compliance with the federal and state laws governing them. The primary federal law is the Credit Repair Organizations Act (CROA), which is enforced by the FTC. Among other things, CROA requires credit repair companies to provide consumers with written disclosures, a written services agreement, and a 3-day right to cancel the agreement. It also prohibits deceptive advertising, and prohibits companies from collecting payment from the consumer prior to completing the agreed-to services. The various state laws overlap with the federal requirements under CROA, and many impose some important additional requirements. Some examples of additional state-law requirements imposed by various states include: obtaining a surety bond for the protection of consumers, obtaining a license from the state before providing services to that state’s residents, providing a 5-day right to cancel, notifying consumers of the company’s statutory agent and bonding company, and other various mandates.
What basic things can I do to improve my credit score?
Dispute inaccurate, obsolete, and unverifiable items on your credit reports. If you see items on your reports that you do not recognize, or see late payments that you believe you paid on time, you have the right to dispute these items with the credit reporting agencies.
Establish new positive credit if you do not have at least two to three open accounts with positive payment history. One option is to open a secured credit card; but, make sure the card reports to all three of the major credit bureaus (I will add a good option here soon), and keep the balance at about 7% to 10% of its limit.
Pay all current creditors on time – a new late payment appearing in your credit file can cause a large drop in your credit score. You will be better served to pay current bills on time instead of paying a credit repair company.
Pay down the balances on your revolving credit accounts, such as credit cards. Ideally your balances reported to the credit bureaus should be no more than about 7% to 10% of your available credit limit.
Resolve any outstanding collections being reported – Ideally, try to negotiate with the collector to delete the item from your credit reports in exchange for your payment of the account; be cautious about making partial payments, since doing so can re-set the statute of limitations and can make the derogatory account appear more recent (and more damaging to your score) on the credit report. Collections can remain on your report for a maximum of about 7 ½ years from the date that you first went delinquent with the original creditor—concentrate on any newer collections first.
Do not close old credit cards. The FICO scoring model factors in the length of time your accounts have been established – generally, the longer your credit history, the better. If you have an old card that you have not used recently, use it to purchase something that you would be buying regardless, such as a tank of gasoline for your car.
Look at Reason Codes for clues. If you buy a credit report with a FICO score, it will list, in order of significance, the negative factors impacting your score. You should work on correcting the underlying problems related to these “score factors” or “reason codes,” since they are the primary causes of your scoring deficiency.
The CreditReason Credit Repair Company Review
You may have heard the Federal Trade Commission (FTC) adage that a credit repair company (CRC) cannot do anything that you cannot do yourself. And the FTC follows up with the sweeping statement, "We've Never Seen a Legitimate Credit-Repair Operation." Steven Baker, director of the FTC’s
I have searched and reviewed some so-called credit repair “review” sites, most of which appear to be thinly-veiled marketing ploys by affiliates who profit by funneling consumers to the one or two credit repair companies that receive their favorable reviews. For each consumer who clicks through the link on the “review” site, the affiliate operating the site gets paid by the credit repair company.
This profit-driven arrangement is a recipe for biased and sometimes blatantly false reviews. In fact, the FTC has implemented rules that require full disclosure of such an affiliate arrangement so that consumers can better evaluate the quality and credibility of the purported product reviews. In addition, almost all of these types of review sites are operated by professional marketers who know very little about credit reporting, credit scoring, credit repair, and the consumer protection laws that apply to the field.
That is why I was compelled to provide some honest, accurate information that will help you decide whether paying a credit repair company makes sense for you, and if so, how to choose a reputable company that is a good fit for you.
My Own Disclaimer. Yes, similar to the “review” sites that I just criticized, I may receive compensation if you click through the various links provided on this site. I, however, at least tell you this up front. I have carefully and honestly reviewed each company in light of my experience, education and training in the consumer credit field.
Does Hiring a Credit Repair Company Make Sense for You?
Not everyone with a negative credit report is a good candidate for credit repair. For example, if you are not able to pay your current bills on time, any benefit of deleting negative items from your reports likely will be offset by the new derogatory information appearing on your reports. You would be better served to pay current bills instead of a credit repair company. To that end, there are some good online budgeting products that can help.
Also, if you have the time and interest to learn the ins and outs of credit reporting and credit scoring models, then you can educate yourself and perform your own credit repair – as the FTC is fond of stating, there is nothing a credit repair company can do for you that you cannot do on your own.
But, if you are facing a short timeline for refinancing or purchasing a home, or simply do not have the time and energy to commit, then full-service professional credit repair may make sense for you.
CreditReason’s Evaluation of Credit Repair Companies
The Evaluation Method. I did a little digging to find a few CRCs that appeared to operate legally and appeared equipped to do what they claimed they could do. I could not submit my own credit profile to more than one company as a test, so I created a set of parameters as a gauge for how each company fared. I selected the evaluation criteria based on my own experience and research in the credit reporting and credit correction arena, including my knowledge of the laws governing credit reporting and credit repair. I settled on the following criteria, with each weighted numerically as shown:
- BBB Accreditation (Yes=10, No=0)
- BBB rating (With numerical scores assigned as A=10, B=8, C=5, D=3, F=0)
- Consumer Complaints (0 to 5=10, 6 to 10=8, 11 to 15=6, 16 to 20=4, 21+=0)
- Requires full or partial payment prior to complete performance of all promised services? (No=10, Yes=0)
- Written Documents (Does the CRC provide all written documents required under CROA, including written contract, disclosures, and notice of cancellation rights? Yes=10, Most but not all=5, No=0)
- Website Review (Are all statements compliant with consumer laws, including CROA, FCRA, FDCPA, and FTC? Yes=10, Most but not all=5, No=0)
- Attorney or FCRA certified staff (attorney=10, FCRA Certified=5, Neither=0)
- Privacy Policy (Strong Policy=10, Weak Policy=5, No Policy=0)
Due to the sheer number of CRCs that maintain a presence on the internet, I limited the initial sample size to 10 companies. The method of selecting the CRCs that are included was simply to select the names well-known to me in the industry, and to run a Google search on “credit repair” to augment the list with CRCs that appeared first in the search results. Sites that appeared to be nothing more than lead generators were skipped over, as were any 501(c)(3) non-profits. If you would like me to evaluate a company not currently listed, please click here.
If you are considering employing a credit repair company, these organizations represent those that scored highest based on CreditReason’s evaluation criteria and point system. The companies are listed alphabetically.
ScoreCorrect
Sky Blue Credit Repair
Additional Disclosures. Note again that none of these companies worked on my personal credit report. I have, however, performed legal services for one of these CRC’s. My hope is that the objective nature of the criteria used will temper any claim of bias toward that particular company. Nonetheless, please consider the potential for reviewer bias if you are comparison shopping.
Observations. Upon completing the evaluation process, I was pleasantly surprised that there are several credit repair companies that appear to operate above-board and know what they are doing from a legal and practical standpoint. If you decide to employ a credit repair company, you should shop and compare pricing, services, methods, and legal compliance so as to select a company that best fits your needs.
Here are some things you should consider when completing your own due diligence:
What is the total cost of the program? Beware of hidden charges for things like credit reports and extra services that another company may include in its standard pricing. Also, be wary of a company that wants to charge you before performing any service or charges a “low monthly fee” that goes on indefinitely or that does not include all charges.
Is the company licensed/bonded in your State? Many states require credit repair companies to be licensed and bonded. You can check this out with the Attorney General’s office in your state, or ask the company to see a copy of their license or bond.
Is the company BBB Accredited? You can check this at www.BBBonline.org. Also check the company’s BBB rating, as there are some companies with good ratings that simply have not jumped through the hoops to become accredited.
What promises are made? Steer clear of any company that promises to delete all negative items from your report, regardless of whether the information is accurate, timely and verifiable. Instead, look for realistic promises and claims that can be verified.
Are the people processing your file properly trained? If the company is not an attorney-based firm, ask whether the people doing the work are certified under the Fair Credit Reporting Act (FCRA) by the Consumer Data Industry Association (CDIA). The CDIA provides training and a certification examination that requires the recipients to demonstrate at least a baseline level of knowledge on the law governing credit reporting.
Check the FTC website. The FTC lists some additional factors to examine if you are considering hiring a credit repair company.
