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Anyone struggling with debt and bad credit has invariably been confronted with ads from companies offering to help repair your credit.
It may seem like an easy fix and a quick way out of your troubles, but there are many reasons to avoid going down this route, experts say.
For one — like many services offered to desperate people facing financial difficulties — scams abound. Also, almost all of what these services offer, you can do yourself for free.
At the same time, for someone who is feeling overwhelmed by their financial situation or is intimidated by trying to pull themselves up from underwater, a credit repair service might help solve some of your issues.
The key is to understand who you are dealing with and if they are really qualified to help you with your situation.
“If there is information that is on your credit report that is inaccurate and you are struggling with figuring out how to fix that yourself, a credit repair agency might be beneficial,” said Bruce McClary of the National Foundation for Credit Counseling. “But people need to keep their guard up when shopping around.”
What credit repair agencies can and can’t do
To begin, you need to understand what a credit repair agency can and cannot do.
Credit repair services can only help if there are indeed errors on your credit report. It’s not as uncommon as you might think. A 2021 survey by Consumer Reports found that more than a third of the nearly 6,000 people polled had discovered mistakes in one or more of their credit reports.
Mistakes can range from failing to remove old debts that have been paid off or including charges that were made as the result of verified identity theft, all of which can drag down your credit score. To resolve these, you have to file a dispute with each of the three main credit agencies, Experian
EXPGY,
Equifax
EFX,
and TransUnion
TRU,
A credit repair service will offer to file those disputes on your behalf. There is no guarantee that they will succeed and there is nothing for them to do if your credit report is all correct.
Now, this is something you can do yourself for free, but it takes time and patience. For those uncomfortable or intimidated by navigating this kind of bureaucracy, these kind of services can provide a helpful service.
Red flags to watch out for in a credit repair agency
People facing the threat of financial ruin are understandably stressed, which unfortunately can make them vulnerable to credit repair telemarketing schemes overpromising big results.
There are several red flags to look out for. If a company guarantees results, you should look elsewhere. Also, if they make you pay up front, it may well be a scam.
“The law says they can’t charge you until they can prove that a problem has been removed from your credit report and has stayed off for at least six months,” said Sarah Chenven, the chief executive of Working Credit, a non-profit credit counseling firm.
In August, the Consumer Financial Protection Bureau reached a $2.7 billion settlement with the two largest credit repair brands in the U.S., Lexington Law and CreditRepair.com, for charging illegal advance fees for their services. The companies have been barred from engaging in telemarketing of their services for 10 years, and PGX Holdings Inc., which owns both firms, has filed for bankruptcy.
Beyond misleading promises and fee structures, the credit repair space has also attracted far more unsavory actors.
Last year, a federal judge shut down a nationwide credit repair company called Financial Education Services after the Federal Trade Commission accused it of being a $467 million pyramid scheme that targeted people whose finances had been left in disarray by the pandemic.
In addition to allegedly offering various bogus credit repair services, the FTC charged the firm with also roping its customers into a multi-level marketing scheme that promised them payouts for bringing in more credit repair customers, but which the agency said was really a Ponzi scheme. An attorney representing the firm didn’t immediately respond to a message seeking comment.
In a separate case in 2022, federal prosecutors alleged that a group running a credit repair firm stole customers’ identities as part of a much larger real-estate scam. The alleged ringleaders of the scheme have pleaded not guilty and are awaiting trial. Their lawyers didn’t respond to messages seeking comment.
What are your other options if you’re drowning in debt?
Experts say that if you find yourself deep in debt, there are a number of steps you should be taking to try to get your finances back on track. Credit repair is really just step one in that process and should never really be thought of as an end-all, be-all.
The next thing to attempt to deal with are any delinquencies that are causing your credit ro go down. Call whomever you owe money to and see if you can arrange a payment plan or if they’ll agree to allowing you to pay a smaller, lump sum payment in return for them waiving the rest of the debt. Delinquencies will remain on your credit report for up to seven years, but their impact diminishes if they are reported as closed.
For people in this situation, there are many non-profit credit counseling services that can help you formulate a plan to dig your way out.
If things are so bad that bankruptcy might be a reasonable option, it’s time to consult with a bankruptcy attorney to determine what your next steps should be.
“It can be terribly painful and even embarrassing to have to file for bankruptcy, but once you get past it, you can start to rebuild your credit profile fairly quickly,” McClary said. “But if you take this step, you need to really learn how to make sure the pattern doesn’t repeat.”
