Is Credit Repair Illegal? Everything You Need to Know

Being turned down for loans and credit cards, renting an apartment, or even getting a job can be hard if you have bad credit. That’s why some people use credit repair services to try and raise their credit scores quickly. But is it okay to use these services? Here’s what you need to know about credit repair laws.

What is Credit Repair?

Credit repair is the process of disputing and fixing mistakes on your credit report so that your credit score goes up. Most of the time, this means hiring a company to look over your report for wrong, out-of-date, or unverifiable information and get it fixed or taken off.

Credit repair companies may also negotiate with your lenders and creditors on your behalf to remove negative items in exchange for payment. They may also advise you on ways to improve your credit score by managing your credit responsibly going forward.

Is Credit Repair Legal?

Yes, legitimate credit repair is legal. The Credit Repair Organizations Act (CROA), enforced by the Federal Trade Commission, regulates credit repair companies and protects consumers from fraud.

As long as a credit repair company operates within the confines of this law, the services they provide are perfectly legal. However, there are plenty of credit repair scams out there that you need to watch out for.

Credit Repair Laws and Regulations

The Credit Repair Organizations Act was passed in 1996 to protect consumers from deceptive advertising, contract terms, and business practices by credit repair companies. Here are some key components of the law:

• Doesn’t allow upfront fees: Credit repair companies can’t charge a customer anything until the work is done completely.

• Credit repair companies must give customers a written contract that clearly explains their services, terms, and conditions, as well as the customer’s right to cancel within 3 business days without being charged.

• Prohibits misleading claims: Companies cannot make false or misleading claims about the services they will perform for consumers. This includes guaranteeing or estimating a specific improvement in a credit score.

• Requires disclosures: Companies must provide consumers with a notice of “Consumer Credit File Rights Under State and Federal Law” before any contract is signed.

In addition to federal law, many states have enacted their own credit repair regulations:

• 37 states require credit repair companies to register and/or be bonded.

• At least 23 states limit or prohibit upfront fees.

• Most states allow a mandatory 3-5 day cancellation period on contracts.

• Many states require specific disclosures and contract terms.

What Makes a Credit Repair Company Illegal?

While credit repair itself is legal, there are many unethical and illegal practices that some companies engage in. Here are some red flags to watch out for:

• Charging upfront fees: No legitimate company will ask for full payment before services are complete.

• Misleading claims or guarantees: No company can legally guarantee a credit score increase or that information will be permanently deleted from your report.

• New credit identity offers: This is illegal. A new credit identity does not fix past credit problems.

• Recommending you dispute accurate information: While you can dispute errors, you cannot legally dispute or try to remove accurate, although negative, information from your credit reports.

• Advising you to misrepresent information: For example, advising you to dispute information as “not mine” when it actually is yours.

• No required disclosures or contract: A company that does not provide you with your legally mandated Consumer Credit File Rights and a contract prior to collecting payment is likely a scam.

• Lack of contact information: A company without a professional website, mailing address, phone number, and email is questionable.

How to Spot Credit Repair Scams

You should thoroughly research any credit repair company before engaging their services. Here are some tips for spotting scams:

• Search online reviews: Check third-party review sites like TrustPilot and the Better Business Bureau to see actual customer feedback. Many scams will have predominantly negative reviews.

• Ask about their process: A vague, sketchy, or “too good to be true” explanation of how they’ll fix your credit is a red flag.

• Verify state registration: Check with your State Attorney General or Consumer Affairs office to confirm the company is properly registered and bonded in your state if required.

• Get references: Ask for referrals from past clients, especially ones similar to your situation. A company that cannot provide references may not have a proven track record.

• Review contracts carefully: Ensure any contract has all legally required terms, disclosures, and provisions like a non-refundable 3-day cancellation period.

• Avoid unbelievable claims: Companies promising to “erase” bad credit or “create a new credit identity” are scams. Legal credit repair takes time and effort.

DIY Credit Repair

If you want to save money, you can legally repair your own credit without hiring a company. Here are some do-it-yourself steps:

• Get copies of your credit reports and review for errors. Dispute any inaccurate information with the credit bureaus.

• Negotiate with creditors to remove negative marks in exchange for payment.

• Write goodwill letters to creditors asking them to remove late payments or other negative items.

• Manage credit responsibly going forward – pay all bills on time, lower balances, and mix types of credit.

• Monitor your credit reports and scores for improvement. Develop healthy credit habits.

• Add positive information to your credit history like new accounts or secured cards.

The most important things are correcting your reports, negotiating with creditors where possible, and practicing good credit hygiene. Note that the DIY process can be slower and more difficult than hiring a professional credit repair service. But with some effort, you can repair your own credit legally.

The Bottom Line

Legitimate credit repair that operates within the confines of federal and state credit repair laws is perfectly legal. But consumers must be vigilant about identifying scams that try to take advantage of people with bad credit.

Do your due diligence, understand your rights and protections under credit repair laws, research companies thoroughly, and read contracts carefully. This will help ensure you choose a reputable credit repair company that can legally improve your credit.