Avoiding Credit Repair and Credit Counseling Scams

Before filing for bankruptcy, most people attempt to consolidate their credit and eliminate debt. They turn to credit repair services and debt relief companies. The problem is that not all companies have your best interests at heart. You need to be wary of companies that make promises that are too good to be true.

The Consumer Financial Protection Bureau does a lot to protect people in your position. However, they can only do so much. You should do your homework before engaging with any debt consolidation company.

Here, we'll help you avoid shady consumer credit repair companies and credit counseling scams.

Are You a Target for a Credit Counseling Scam?

Credit card debt repair companies market directly to people with poor credit histories. They promise to clean up their credit reports for a fee. The truth is, after you pay hundreds (or thousands) of dollars in up-front fees, these companies do nothing to improve your credit score. Worse yet, one of these "credit repair organizations" may vanish with your hard-earned money.

Falling victim to one of these scams does not mean you are foolish. All it means is that you want to reduce or consolidate your debt and need help. You don't go into it thinking that the people on the other end of the phone may commit identity theft.

If you're like most consumers, you assume that credit counseling agencies have relationships with lenders and, therefore, can settle your debts for less than you owe. You don't realize these companies pepper their clients with negative information about financial institutions and make promises they cannot keep.

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. Some companies take advantage of people who are worried about their debt and credit scores.

Some of these so-called "credit counselors" and "credit repair companies" conduct business dishonestly, exploiting unsuspecting customers. Not all of these companies are scams, but there are many to watch out for. Sometimes, filing for bankruptcy is a better choice than seeking credit counseling.

There are credit counseling agencies that are reputable and provide valuable services to financially overwhelmed consumers. Sadly, it can be hard to tell the difference between these agencies and companies that will do anything to get you to write a check.

Generally, if the company contacts you first, they have paid for your data and are not reputable credit counselors.

Warning Signs of a Credit Repair Scam

Legitimate credit counseling agencies will never suggest that you do something illegal. For example, some scammers claim they can get you a new credit identity by obtaining an Employer Identification Number (EIN) for you to use instead of your Social Security number.

It's against the law to secure personal loans and credit cards using fake information. If a company tells you this is the best solution for you, they're up to no good.

There are some things to look for when searching for a reputable debt repair company. There are also warning signs that a company or agency is not on the up and up.

You should take caution if the “credit repair" company does the following:

• Requests an upfront fee
• 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
• Advises you to dispute all the information on your 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 take time. Even if you arrange for a debt management plan, it will take time for the creditors to approve it. It will take even longer for you to complete any agreed-upon payment plans.

Credit Counseling Scams

Some so-called "credit counselors" prey on overwhelmed consumers. They often promise "a clean slate" for a "flat, up-front fee." You should ask yourself why a company would ask you for money when they know you are already drowning in debt.

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. While many legitimate debt management programs exist, you should be careful with companies offering this service.

Falling for these types of scams will make it even harder to pay your bills. Every dollar you pay a credit counseling company is a dollar you could've put toward your debt.

Tips To Avoid Credit Counseling Scammers

There are things you can do to avoid scammers. Unfortunately, there is no way to know whether a company is honest and truthful. But if you follow the below tips, you should be able to find a credit counselor or debt relief company that can help you get out of debt and avoid bankruptcy.

Some helpful tips to avoid 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. Reach out to your state attorney general's office to ensure there are no investigations into the agency.
• As a general rule, nonprofit credit counseling organizations are the best choices. Reputable for-profit companies exist, but screening them will require greater consumer diligence.
• Verify that the organization provides counseling, education, and debt consolidation services.
• Carefully read through any written agreement that a credit counseling organization offers. It should describe, in detail, the services the company provides, payment terms, how long it will take to achieve results, and the organization's business name and address.
• Avoid paying up-front fees. Reputable agencies do not charge hefty up-front fees. Instead, they usually ask for small monthly fees. The initial consultation should always be free.
• Beware of high fees, like high monthly service charges. This will only increase your total debt.
• Confirm payments with creditors. Some debt repayment services require consumers to send lump-sum checks to pay creditors periodically. Verify that your creditors are receiving these payments.
• Check reviews. Reviews and testimonials from other people who have used credit counseling services help gauge the credibility and effectiveness of different agencies.

Contact a Consumer Protection Attorney Near You

Bankruptcy attorneys are often familiar with credit repair and credit counseling companies. They can advise you 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.

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