Your credit report contains information about your financial history, including credit, loans, bankruptcy filings and your bill-paying habits. Credit reporting companies maintain credit files and assess credit ratings based on the information in those files. Credit reporting companies sell credit reports to businesses that have a legitimate need for the information, such as employers, creditors and insurers. Credit repair scams are a danger to people looking to repair their credit, but there are legitimate programs that help consumers repair bad credit and develop healthy financial habits.
Avoid Scam Programs
Consumers can avoid credit repair scams and possible illegal actions by carefully reviewing the claims made by companies and organizations. The Federal Trade Commission, or the FTC, recommends rejecting companies that want payment before they provide any services since this practice is illegal under the Credit Repair Organizations Act. A legitimate credit repair organization informs you of your rights and tells you about credit repair efforts you can perform yourself. The company should not promise to clear accurate and current information from your credit report, instruct you to dispute all information in your credit report or suggest that you apply for an employer identification number to create a new credit identity. The company should not discourage you from contacting the three credit reporting agencies for copies of your credit report.
Credit Counseling
Credit counseling programs are often offered by nonprofit organizations; however, a nonprofit status does not prevent a company from overcharging for services or engaging in questionable tactics. Credit counseling may be provided by private counselors, for-profit companies, credit unions, universities and community development organizations. Many nonprofit credit counseling programs provide a range of free services that includes financial literacy classes, budgeting and debt management. Counselors meet with you privately to discuss your credit situation and the best way for you to repair your credit. Participation in credit counseling programs is usually long-term and lasts until your credit repair goals are met.
Debt Management Plans
Your credit counseling service might recommend that you enroll in a debt management plan, or DMP. The credit counseling organization negotiates the DMP agreement between you and your creditors. You agree to make monthly deposits with the credit counseling organization for payment of your unsecured debts, such as loans, credit cards and medical bills. In exchange for your enrollment in the program and often your agreement to refrain from applying for or using credit, your creditors agree to waive fees and lower interest rates. DMPs can take up to four years to complete.
Debt Negotiation Programs
Enrollment in a debt negotiation program, or DNP, is a risky move that can negatively affect your credit for a long time. Debt negotiation, or debt settlement, companies promise to persuade your creditors, mostly credit card companies, to accept 10 to 50 percent less than the amount you owe. Acting on those promises before you are certain that creditors have agreed can cause more debt and legal problems. The FTC recommends checking with your state attorney general's office and the Better Business Bureau to make sure the debt negotiation program you are considering is legitimate and reputable. Avoid companies that charge high fees, ask for a percentage of negotiated savings or advise you to stop paying your bills or communicating with your creditors.
Tips
You have a right to free copies of your credit report from the three major reporting agencies: Equifax, Experian and TransUnion -- within 60 days of an adverse action resulting from your credit report and once a year upon request. The FTC recommends reviewing your credit reports and requesting investigations on your own of any disputed entries.
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