Wednesday August 20, 2008

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Slow and Steady is the Best Way to Clean Up Bad Credit

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Credit repair is a subject that has been on our back burner for a long time, but a piece of spam received a few days ago brought it to the forefront.

It was a cleverly crafted piece of email - addressed to me, not only in the heytheirfriend @ yayada.com sense but also personalized with my name in really big, red letters.

Harold, it said, more or less, this is your credit score - 450.

And Harold - it said - here is what it could be - 750.

Now, fortunately, I know what my credit score is or I might have had a heart attack. And I also know that if it were 450 it would take a lot more than this particular correspondent could do in a few weeks or even several years to boost my credit score to 750.

"Credit repair" is a big business in this country. You can't watch cable TV after midnight without seeing ads for companies that guarantee to eliminate the bad news being broadcast about your past by TransUnion, Experian, and Equifax, the three major credit bureaus. Look on the Internet and there are dozens of companies dangling the many rewards that clean credit will bring - instant auto loans, lower interest rates, increased prestige in the eyes of the world.

Negative entries such as repossessions, charge offs, and accounts which have been turned over to collection agencies can legally remain on your credit report for seven years. A bankruptcy will be part of your credit history for ten. These black marks will carry less weight with prospective creditors over time IF they are followed with subsequent responsible use of credit, but it is very hard to make them disappear altogether.

Credit repair companies, however, claim to be able to shortcut the process, speed up the clock and, for a price, get many of these black marks removed.

The Federal Trade Commission says "The scam artists who run these ads not only don't deliver - they can't deliver. Only time, a deliberate effort, and a plan to repay your bills will improve your credit as it is detailed in your credit report."

At their worst, credit repair companies may suggest they can open new, pristine credit files under a new Social Security (or Employee Identification) number - which is patently illegal - or they may intimate that they have a special "in" with the credit reporting companies or have found loopholes in the credit laws that no one else is aware of. Some say they can convince the creditor that you don't even owe them money.

Other companies are legitimate - some are law firms which have to be especially careful about keeping their bar status - and they proceed along legal paths to challenge inaccurate or unverifiable entries both with the credit bureaus and with the creditors which provided the negative information.

Repair companies charge fees that vary wildly. In our brief survey we found one company that charged $40 for the first four months of work and then $20 for every deletion of negative information thereafter. Another charges $19 to set up an account and then three monthly payments of $80 and promises results in 45 to 60 days. There are reports of companies charging as much as a flat $500 for their services.

Some companies demand the money up-front and disappear; others offer guarantees - even a bonus rebate - if they are not successful. We have no information on the validity of or the success of anyone trying to collect under these guarantees.

Most ads contain claims that credit will improve in 45 to 60 days; one says that scores will go up at least 100 points in 6 months. FICO, the company that provides the most popular credit score, states that it is difficult to move the score more than a few points in less than six months, so these claims are inflated at best.

The reputable subset of credit repair companies may actually be able to improve your credit reports and your credit scores, at least marginally. Experts estimate that the majority of credit reports contain factual errors and these are fairly easy to get removed; some creditors will not bother to respond to challenges of completely accurate information so the credit bureaus are obligated to drop those entries. However, sometimes negative entries disappear temporarily only to reappear the next time a big creditor such as Sears submits its data to the credit reporting bureaus. Sears may not have responded and verified the initial bad report, but it is still in the computer.

But the bottom line is - even the best of the credit repair companies cannot do anything for you and your credit that you cannot do for your self and do for free.

The Fair Credit Reporting Act requires that both the credit bureau and the entity that provides the credit information be responsible for correcting any inaccurate or incomplete information that appears in an individual's credit report. It is not necessarily easy or quick to request these corrections, but the Federal Trade Commission offers many suggestions for challenging inaccuracies as well as a sample letter for doing so on its website. Also, the three major credit bureaus have procedures and telephone numbers for resolving credit disputes (Equifax.com, Transunion.com, Experian.com).

Just as an aside, there appears to be a lot of confusion in the minds of the public about credit repair and credit counseling. Credit counselors, many of whom are certified and may even be licensed in some locations, assist customers in reorganizing and paying off debt. For a fee (although many are non-profit with sliding fee scales) the counselors will contact creditors, try to set up reasonable repayment plans, perhaps negotiate lower interest rates, help clients set up a budget, identify and deal with spending problems, and so forth. While all of these steps will slowly and surely result in improved credit, most counselors do not offer to "clean" reports. The FTC website also offers information on identifying and choosing legitimate credit counselors.