Avoiding Credit Repair and Credit Counseling Scams

Companies might try to appeal to consumers with poor credit histories — promising to clean up their credit reports for a fee. The truth is, after you pay hundreds (or even thousands) of dollars in up-front fees, these companies do nothing to improve credit.

Worse yet, many "credit repair organizations" simply vanish with the unsuspecting customer's money.

Are All Credit Counseling Programs Scams?

Over a million Americans file for bankruptcy every year, and the average household debt is at an all-time high. Companies have appeared that play on the concerns of people worried about their debt and credit score.

These so-called "credit counselors" and "credit repair companies" conduct business in a dishonest manner, taking advantage of unsuspecting customers. Not all of these companies are scams, but there are many to watch out for. And sometimes filing bankruptcy is the better choice than seeking credit counseling.

Generally, if the company reaches out to you first, they have paid for your data and are not a reputable credit counselor. There are, however, credit-counseling agencies that are reputable and actually provide valuable services to financially overwhelmed consumers.

Warning Signs of a Credit Repair Scam

Watch out for these warning signs. You should take caution if the “credit repair" company:

• Requests fees before providing services
• Does not provide information about your legal rights
• Does not explain debt relief actions you can take for free
• Tells you NOT to contact a credit bureau directly
• Suggests that you get a new credit identity by applying for an Employer Identification Number to use instead of your Social Security Number
• Advises you to dispute all the information on their credit report or engage in fraud

Any company that says they can remove your bad credit or provide instant positive credit reporting is not being honest. Debt settlement, honest credit counseling, and repairing credit problems all take time.

Credit Counseling Scams

As with credit repair scams, some so-called "credit counselors" prey on overwhelmed consumers. They often promise "a clean slate" for a “flat, up-front fee."

Some counselors promise to contact creditors and convince them to accept lower payments, or to charge lower fees and interest rates. This is known as debt negotiation.

Falling for these scams can leave you with even fewer resources as a result of high fees and more delinquent debts.

Tips to avoid credit counseling scammers include:

• Beware of promises that sound too good to be true. Claims of helping you "get out of debt easily" are a red flag.
• Deal with a reputable agency. Check with state consumer agencies and the local Better Business Bureau to make sure there have been no or few complaints against the organization, and that the complaints that have been raised were favorably resolved.
• As a general rule, non-profit credit counseling organizations are the best choices. There are also reputable for-profit companies, but screening the good from the bad will require greater consumer diligence.
• Verify that the organization provides counseling and education, as well as debt consolidation and payment services, to help consumers achieve financial stability and remain debt-free.
• Carefully read through any written agreement that a credit counseling organization offers. It should describe in detail the services to be provided; the payment terms for these services, including their total cost; how long it will take to achieve the desired results; any guarantees offered; and the organization's business name and address.
• Avoid paying up-front fees. Reputable agencies do not charge big up-front fees but may take a small monthly fee for a debt repayment service. The initial consultation, however, should always be free.
• Beware of any high fees or required contributions, like high monthly service charges, that may add to the overall debt load and defeat efforts to pay off bills.
• Confirm payments with creditors. Some debt repayment services require the consumer to periodically send it one lump-sum check that it divides up among the creditors. Debtors who enter into these types of arrangements should verify with their creditors that the payments are actually being made.

Protect Yourself With Legal Advice

Bankruptcy attorneys are often familiar with credit repair and credit counseling companies and can advise you whether to work with an agency or avoid it altogether. Consider seeking the advice of a lawyer before reaching out to an unreputable company about your debt.