July 6, 2012

Is Credit Repair Right For Me?

Credit repair companies, formally known as credit repair “organizations” in the Credit Repair Organizations Act (hereafter “CROA”), act on behalf of consumers and attempt to get negative, or otherwise offensive information, removed from their credit reports. In general, the credit repair industry, which is over two decades old, tends to have a fairly bad reputation, warranted or not. In fact, the Federal Trade Commission has called credit repair a “scam” and credit repair operators “con artists.”

How does credit repair work?

Credit repair companies don’t typically disclose their exact tactics, but most people believe they send dispute letters to the credit reporting agencies challenging the validity of negative information in hopes that the credit bureaus will be unable to verify its accuracy and then remove it, which is what the Fair Credit Reporting Act requires.

If you are wondering how prevalent credit repair disputes are, according to the Consumer Data Industry Association, the trade organization of the credit reporting agencies, credit repair disputes account for no less than 30% of disputes received by the credit reporting agencies. In a nutshell, the volume is staggering.

Credit repair services are not free, far from it. But, they’re not allowed to charge their customers until after services have been rendered. And, they cannot promise or guarantee the removal of negative credit information. They must also provide mandatory disclosures telling consumers they can dispute their own credit reports for free. Finally, they cannot tell you to simply dispute all of the negative items.
How is the industry regulated?

These aforementioned rules are straight out of the CROA, which is the Federal law that defines how credit repair organizations must do business in order to stay out of the FTC’s crosshairs. If the credit repair company charges you in advance for their services, or promises to get your bankruptcy deleted from your credit reports, then they’re violating Federal law. If they counsel you to dispute everything that’s bad on your credit reports, or they don’t tell you you can do it on your own for free, that violates Federal law, too.
How much does credit repair cost?

Most credit repair services are billed under one of two pricing structures: subscription and pay-per-deletion. The subscription pricing is, obviously, a monthly fee charged against a credit card meant to cover services rendered during the prior month. The pay-per-deletion model is a newer pricing structure and is the brainchild of the creator of a credit repair facilitation software.

Under the pay-per-deletion model, the client is only charged after a credit repair organization has successfully had negative information deleted from their credit reports. According to one company, “Pay-per-delete makes it easier for credit repair organizations to be fully compliant with CROA’s restrictions against charging fees prior to services being performed.”

Credit repair subscriptions generally run between $49 and $79 per month, but that can vary depending on the company. The average number of months consumers stick with the subscription is all over the place, but it seems to be somewhere between 8 and 18 months, depending on whom you ask. That means consumers are paying, on average, $64 per month for about a 13 months, or $832, for credit repair.
Outsourcing vs. DIY credit repair.

Still, the question remains: why would someone pay a credit repair company to send dispute letters to the credit bureaus when you can do it on your own for free? The answer varies, depending on whom you ask. According to Kelly Wells, Owner of Credit Restoration of Washington, a credit repair company, “Consumers certainly can dispute items themselves and don’t have to hire anyone to act as their proxy, but do you really want to struggle with disputing inaccuracies and deal with the credit bureaus yourself or would you rather hire a professional to do it for you? That’s a question only the consumer can answer.”

According to another credit repair company, “A consumer navigating the credit repair process by themselves is equivalent to doing their own taxes. It’s ok if you have a 1040EZ, but if you run into issues, you might need to consult an accountant who knows how to navigate the 1,000 plus pages of tax code. The credit system is far more complex than anyone would have you think.”

When posed with the same question Chad Kusner, President of Credit Repair Resources, a credit repair company, said, “It depends. Everyone has different situations and events that bring them to our door.” He continues, “My company declines 18-22% of our applicants because there is not enough to warrant the investment in our services.”



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