When You’re in Debt, Credit Repair Scams Can Make Your Finances Worse
Consumers are vulnerable to a variety of credit repair scams that promise a solution, especially if you have a shaky credit history. These scams often appear as an apparition of hope just when life has delivered you with financial difficulties that send your credit rating plummeting. Don’t be fooled. These companies are predators looking to suck you in because they want to profit off your misfortune, rather than help you.
The truth is that there is no fast solution to get poor credit to miraculously become excellent overnight. Negative information stays on your credit report for up to seven years. On the up-side, positive information stays on your credit report for up to 10 years. Once you have a black mark, it’s unfortunate how the lending industry holds you accountable for seven years, but it is a fact of life in modern society. In this article, I’m going to expose and dissect a few of the most popular types of scams.
The first type of scam I am going to address is credit repair firms. I always advise clients to avoid credit repair companies like the plague. These companies will promise to raise your credit score in a short period of time to help you secure a good rate on a mortgage or car loan. They will charge you hundreds, sometimes thousands of dollars to provide you with their services. In reality, credit repair firms steal your hard earned money and dig you deeper in debt.
The tactics used by credit repair firms’ verge on the edge of being illegal, if not outright illegal. They commonly look for legal loopholes that are quickly found out by the credit bureaus and then almost always made illegal. Credit repair companies can actually get you into legal trouble personally, too. As a consumer, you can also be held accountable for fraud if you misrepresent your social security information or lie on a credit application.
A popular credit repair firm tactic that firms used was called piggybacking. “Piggybacking” would basically allow a consumer with poor credit to rent out another person’s good credit history. Consumers would pay hundreds of dollars to the consumer with good credit and the agency and would instantly reap the benefits of a good credit history. Many consumers secured mortgages or low rate car loans due to this completely legal practice. This tactic is now being made illegal.
Another popular legal tactic used in the past was to dispute every single negative item on your credit report. Credit bureaus were required to remove negative information from your file if they didn’t send a response to your dispute within thirty days. Early in my career, a representative from Trans-union informed me that credit reporting agencies are so overloaded with paperwork often times you won’t get a response.
Credit repair agencies would charge hundreds of dollars for this service. The part the credit repair firms omitted was that you could do this yourself. Now credit reporting agencies have gotten smarter. As a consumer, you can still try this tactic, but it isn’t likely to work. Even it does work, it will be temporary. As soon as the credit bureau confirms the information is accurate it will be placed back on your credit file.
There are many other tactics credit repair agencies employ. Another tactic that often coerces desperate consumers is establishing a tax id to get new credit rather than using your social security number. This is fraud, and you can get in trouble. My advice as always is to not ever get involved with a credit repair agency under any circumstances. If you’re still tempted make sure to check out the credit repair section on the Federal Trade Commission’s website. It is always a wise idea to speak with a qualified attorney any time you are making a large financial decision.
We’ve all seen the Internet ads that promise to reduce your debt by half. There are also companies that offer empty promises to reduce your debt by half. These are sometimes called debt consolidation companies or debt settlement companies. I always advise my clients against using these firms. There are a lot of problems that can occur. If a company is offering to get your debt reduced by half, most of the time they set up a trust account where you make monthly payments.
The company will hold your money in this trust account until you have accumulated a roughly large lump sum. In the meantime, your bills are not getting paid, you’re getting months of late payments on your credit history, and your accounts have gone into collections. Your credit is suffering, and the consolidation company is collecting fees off your hard earned money while ruining your credit. Once your account is in collections, the company will negotiate with the creditor or collection firm, thus possibly reducing your debt in half.
The big part of this scam is that this is nothing you can’t do yourself. However, I wouldn’t advise consumers to wait until their accounts are in collections to come up with a plan. If you do end up in collections, settlements are often accepted directly thru the creditor or collection agency. When negotiating settlements with a creditor always get the settlement offer faxed to you in writing, and retain it for your records for three to five years.
Timing is also important, when dealing with a collection firm it is best make a settlement offer at the end of the month, when collectors are scrambling to make their monthly goals. Use this information to take advantage of the lowest settlements. It always depends on the creditor or company you are dealing with, but sometimes I was able to settle accounts for as little as 40 percent. Keep in mind also, that if you are forgiven more than $600 , you will have to claim it as income to the IRS.
Non-profit credit counseling firms can be a good option for some people, but it is important to know the organization is reputable. Always make sure the agency you are dealing with is accredited. It is important to ensure the agency is non-profit, and that they are knowledgeable on all aspects of credit. Counselors that are certified have to pass several tests before obtaining certifications.
Debt Management Plans (DMPs) can be good for some people, depending on your personal circumstances. If you are the type of person who thinks one payment is the solution to your budgeting problems, and feel like you need on-going financial coaching, it might be your best option. Sometimes your monthly payments are lower than what you are paying now, which would make a DMP a wise choose.
Of course, it does depend on the person, but most importantly, people need to empower themselves financially by getting educated. A good resource offered by credit counseling agencies are educational classes. Another excellent resource that I use and love is MSN money.
I also encourage people to look at their budget and see exactly where their money is going.Sometimes drastic changes need to be made in order to achieve your financial goals. It is up to you to decide what your financial priorities are, and what you are willing to cut back on. You need to look at your individual circumstances, then make decisions. It is all up to you and your choices. There are solutions out there to getting your debts paid off faster, but they are not going to come easy.
About the author: Jennifer Lane is a certified credit counselor and is taking questions I can answer in upcoming articles. Please feel free to e-mail your credit and debt questions to pisceshalcyon@hotmail.com.
