Credit Repair Organizations Act: What You Need to Know

The Credit Repair Organizations Act is a federal law that regulates businesses and services that seek to improve a person's overall credit rating. In general, credit repair organizations promise to have negative information removed from a person's credit report. The Credit Repair Organizations Act, or CROA, makes it illegal for any organization to make false claims about its ability to "fix" a person's credit report or credit score.

How Credit Scores Work

A credit score is a number that gives lenders such as banks a glimpse into a person's creditworthiness, or how likely it is that a borrower will repay the lender. Lenders consider a person's credit score to be very important since a low score means that a person is a high-risk borrower, while a higher number means that someone is less likely to miss a payment or even default on a loan. Credit scores range from 300 to 850; a score above 720 is considered excellent, and a score between 620 and 720 is considered fair to good. The important thing to remember is that the higher your credit score, the more likely you are to be allowed to borrow money. Higher credit scores also mean that the terms of a loan will be more favorable, such as a lengthier time to repay the money or a lower interest rate.

Some of the factors that make up a person's credit score include payment history on other loans, how much money a person still owes, length of credit history, and whether a person has opened any credit accounts recently. Companies called credit reporting agencies compile this information and submit it to an organization called FICO, or Fair Isaac Corporation, which calculates the actual credit score. Because different credit reporting agencies may have different information about a person's credit history, your score can vary depending on the agency you choose to calculate your score.

Credit "Repair" Organizations

Unfortunately, some organizations promise that they can remove negative credit information from a person's credit report. For example, such organizations have advertised that they can eliminate references to repeated late payments of loans, defaults on loans, or even bankruptcies. They may also charge a fee (often in advance) for services that a consumer can perform herself. Some have even attempted to get around a bad credit score by altering a consumer's identity such as by obtaining a new employer identification number.

The Credit Repair Organizations Act

In 1996, Congress passed the Credit Repair Organizations Act in response to growing complaints about organizations fraudulently promising consumers to perform services that were actually prohibited by law. Some of the protections the law offers consumers include:

• Prohibiting organizations from misrepresenting their services
• Requiring an organization to provide a written contract with the consumer
• Allowing the consumer three days to cancel the contract
• Preventing an organization from charging for services until they have been rendered

The Credit Repair Organizations Act is enforced by the Federal Trade Commission, which is an independent agency of the United States government responsible for consumer protection and preventing anticompetitive business practices. This means that the FTC can act to shut down credit repair organizations if it learns of fraudulent or illegal activity, such as if a consumer makes a complaint.

However, individuals can also sue credit repair organizations if they believe they had been defrauded without having to complain to the FTC. As long as a credit repair organization violated the CROA-such as by failing to offer a written contract or taking payment before helping her-a consumer can file a lawsuit to seek the return of any money paid. A court may also order the organization to also pay attorney fees or punitive damages, which is an amount of money in addition to a consumer's losses that's intended to deter others from violating the law.

The FTC recommends that anyone considering using a credit repair organization to first attempt to help themselves by contacting credit reporting agencies directly. People can usually correct errors in credit reports for free. The FTC also advises consumers to consult with reputable credit counseling organizations with help in household budgeting and debt management.