How Does a Credit Repair Agency Work?

What's a Scam and What Isn't

Radio and television commercials for credit repair agencies abound. However, these businesses are often fronts for fraudulent activity, misleading desperate consumers who don't know better. Commons claims are that they can repair debt with no money down, remove legal judgments and create a new identity with a clean credit record.

The Federal Trade Commission warns that "the fact is there's no quick fix for creditworthiness. You can improve your credit report legitimately, but it takes time, a conscious effort and sticking to a personal debt repayment plan." These operations are a scam, with only the non-profit Consumer Credit Counseling Corporation a legitimate solution to debt problems.

What Credit Repair Agencies Promise

These agencies make big promises to customers that they can't deliver on. In fact, some of the actions they advise could be illegal. They may ask you to create disputes for every recorded account on a credit report, register for an employer identification number or lie on a loan or credit application. All of these are federal crimes punishable by fines and jail time.

How to Spot the a Credit Repair Agency Scam

The first thing that these operations will do is ask for an upfront payment. According to federal law, credit agencies can't ask for any fees before services are rendered; cash before action is a sure sign of a shady business. Next, the companies will often suggest that you bring in your credit reports so that they can pick out items to dispute in your stead. However, these disputes may be done for free by the consumer themselves with a minimum of paperwork.

These companies will also neglect to apprise you of your credit rights and recommend no direct contact with creditors. They also might try to persuade you to try "file segregation"--the illegal establishment of a new credit identity by using the EIN instead of a valid Social Security number.

Because they don't share what the consumer can do for free, people stand to lose their hard-earned money for little gain. With the added danger of illegal activity, credit repair agencies are usually a very bad bet.