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If you need to improve your credit health, you’re not alone. Millions of people have a bad credit score, often due to delinquencies, or late payments. According to a new report from the New York Federal Reserve, people who are behind on their credit cards and auto loans are getting worse. Having poor credit can limit your financial options, but credit repair companies may be able to help.
Credit repair companies specialize in helping people fix their credit, but unfortunately, there are some companies that take advantage of people. It’s important to understand the laws of each state so you can protect yourself and choose the right credit repair company.
This post tells you about the federal credit repair laws as well as the credit repair laws in each state. Knowing your rights and the credit repair laws is the first step on your credit repair journey.
Having bad credit can make life difficult It can prevent you from getting approved for loans and credit cards, renting an apartment, or even getting a job That’s why some people turn to credit repair services to try and improve their credit scores quickly. But is using these services legal? Here’s what you need to know about the legality of credit repair.
What is Credit Repair?
Credit repair involves disputing and correcting errors on your credit report to improve your credit score. This usually involves hiring a company that works on your behalf to identify inaccurate, outdated or unverifiable information on your report and get it corrected or removed.
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:
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Prohibits upfront fees: Credit repair companies cannot collect any fees from a consumer until services have been fully performed.
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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.
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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.
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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:
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37 states require credit repair companies to register and/or be bonded.
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At least 23 states limit or prohibit upfront fees.
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Most states allow a mandatory 3-5 day cancellation period on contracts.
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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:
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Charging upfront fees: No legitimate company will ask for full payment before services are complete.
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Misleading claims or guarantees: No company can legally guarantee a credit score increase or that information will be permanently deleted from your report.
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New credit identity offers: This is illegal. A new credit identity does not fix past credit problems.
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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.
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Advising you to misrepresent information: For example, advising you to dispute information as “not mine” when it actually is yours.
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Not required to give you information or a contract: A business that doesn’t give you your legally required Consumer Credit File Rights and a contract before asking for money is probably a scam.
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Lack of contact information: A company without a professional website, mailing address, phone number, and email is questionable.
How to Spot Credit Repair Scams
Before hiring a credit repair company, you should do a lot of research on them. Here are some tips for spotting scams:
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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.
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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.
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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.
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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.
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Review contracts carefully: Ensure any contract has all legally required terms, disclosures, and provisions like a non-refundable 3-day cancellation period.
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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:
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Get copies of your credit reports and review for errors. Dispute any inaccurate information with the credit bureaus.
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Negotiate with creditors to remove negative marks in exchange for payment.
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Write goodwill letters to creditors asking them to remove late payments or other negative items.
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Manage credit responsibly going forward – pay all bills on time, lower balances, and mix types of credit.
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Monitor your credit reports and scores for improvement. Develop healthy credit habits.
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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.
Credit Repair Organizations Act (CROA)
CROA dates back to 1996. The Federal Trade Commission (FTC) states that this act “prohibits untrue or misleading representations and requires certain affirmative disclosures in the offering or sale of ‘credit repair’ services.” The specifics of CROA state that the following are illegal:
- Exaggerating or misrepresenting the service
- Submitting false information to credit bureaus and data furnishers
- Providing a new identity to clear your credit history
- Charging customers up front
- Requiring customers to waive their rights
Credit repair laws for each state
In addition to federal laws, many states have laws that regulate the credit repair industry. The state consumer credit repair laws provide protection from companies that take advantage of people who are experiencing financial hardship. While many states have laws, there are some that don’t. Check the graphic below to see if your state is one of the few that doesn’t have specific laws for credit repair.
It’s helpful to know that the state credit repair laws are based on the state in which the credit repair organization is operating from. Not only must they comply with their state credit repair laws, but they must abide by federal laws as well.
Depending on the state, they may require that the credit repair company has:
- A state registration requirement
- A surety bond to cover potential damages to consumers
- A required cancelation period after the consumer signs the contract
- A refund period after the consumer signs the contract
Here is a list of each state and some specifics about their laws.
Credit Repair is Illegal
FAQ
Are credit repair scams illegal?
Credit repair scams that involve “file segregation” or hiding unfavorable credit history are often illegal. Credit repair companies are required to provide consumers with complete information about the services they will provide. They may not charge a fee until after services have been provided.
Is credit repair legal?
Credit repair is legal, and you can do it yourself. What Is Credit Repair? Credit repair is a process for rebuilding your credit and improving your credit score after they’ve been damaged by poor credit habits, financial setbacks, identity theft, or credit reporting errors.
What are the main credit repair laws?
These are the two main laws that protect people’s rights to fix mistakes in their credit reports: These laws are the Fair Credit Reporting Act (FCRA) and the Credit Repair Organizations Act (CROA).
Who are not considered credit repair companies?
The law defines a credit repair company as an entity that sells services related to maintaining accuracy in a consumer’s credit report. However, this does not include banks, lenders, credit card companies, or non-profits like consumer credit counseling agencies.
What is the Credit Repair Act?
The Act bars companies offering credit repair services from demanding advance payment, requires that credit repair contracts be in writing, and gives consumers certain contract cancellation rights.
What if a credit repair company violates my rights?
State laws often enhance federal protections by requiring credit repair companies to be licensed and registered to operate legally in the state. There may also be state-specific laws regarding contract and service terms. If a credit repair company has violated your rights, report the issue to the FTC and your state’s attorney general.
Are credit repair people legal?
There is no law against credit repair services, but you need to find companies that follow state and federal rules. Jun 22, 2024.
Is it illegal to change your credit score?
“You have a right to dispute inaccurate information in your credit report by contacting the credit bureau directly. However, neither you nor any ‘credit repair’ company or credit repair organization has the right to have accurate, current, and verifiable information removed from your credit report.
Is it legal to have a credit sweep?
Is credit boosting legal?
No, inserting false information into your credit reports is a form of fraud. You can improve your credit score legally, however, by removing inaccurate information and being responsible with credit accounts.