Debt repair companies claim to help you settle your bills for much less than you owe or to fix bad credit by erasing negative information from your TransUnion, Experian and Equifax credit reports. These firms often exaggerate the extent to which they can help you, the Federal Trade Commission warns, or perform no services once they get your money.
Credit Repair
Credit repair involves disputing negative credit report information. The Fair Credit Reporting Act allows disputes to help you clear up mistakes on your reports. Its amendment, the Fair and Accurate Credit Transactions Act, requires the credit bureaus to give you free credit reports every 12 months. Credit repair firms exploit these laws by finding minor problems to dispute, since the bureaus must erase the whole negative entry if they are unable to verify the disputed part. You pay a fee for their service, although they cannot collect it by law until they are done, according to the FTC.
Debt Settlement
Debt settlement companies contact your creditors on your behalf and negotiate reduced amounts and they typically charge a percentage of your debt that can run up to 18 percent, according to MSN Money writer Liz Pulliam Weston. The cost is offset by your savings on the reduced amounts if the company does a good job.
Credit Repair Problems
Some credit repair companies abuse the FCRA by disputing everything negative on your credit reports, including accurate items. The credit bureaus can legally dismiss such complaints because they are obviously frivolous, meaning you pay for ineffective services. Unscrupulous repairers sometimes have you get an Employer Identification Number to use in place of your Social Security number so lenders do not see your bad credit records. The FTC warns that this illegal tactic subjects you to fraud charges.
Debt Settlement Problems
Some debt settlement companies are unscrupulous, Pulliam Weston warns, and take your payment without doing any negotiation. The settlement process takes time, so your creditors may decide to send your accounts to collection agencies or sue you in the meantime. Your credit score takes a hit after successful settlements because your credit reports show that you paid less than what you originally owed.
Self Help
Order and check your own credit reports through the official source, AnnualCreditReport.com, and file disputes with the credit bureaus yourself, the FTC advises. This process is free and simple, as the credit bureaus have dispute submission forms on their websites. Legally they have 30 days to attempt verification of the information and remove unverified entries from your credit reports. You can also negotiate your own settlements with credit card issuers, loan companies and other creditors or work with a nonprofit credit counseling firm to develop a manageable debt repayment plan.
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