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Is Credit Repair Is A Scam?

July 4th, 2007 Subscribe To Our Feed

by Jon Ochs

Everyone has read the negative news articles that state that you should stay away from all credit repair companies, and heard the words, “Credit repair is a scam!” and that there is nothing a credit repair company can do for you that you cannot do for yourself. The reality is that there are a number of credit repair scams, and there are a lot of credit repair companies that are not scams, but seriously underperform for their clients. Here is some great information for you to know that will allow you to make an educated decision about credit repair, and separate the legitamate programs from the scams.

Let’s begin with defining what we mean by “scam”. People have a tendency to loosely describe everything they are not completely satisfied with, as a scam. This is not the correct use of the word. A scam is a deliberate process of separating you from your money without delivering the stated product or service in the manner promised. I can tell you from experience that as far as credit repair goes, most of what is being called a scam is really just a poor business model. I will now explain the credit repair business models used by nearly every credit repair company, and I think you begin to see why there is so much negativity surrounding the credit repair industry.

Here is an outline of the two most common business models for a credit repair service. After each one, I will outline the problems associated with it, then, I will show you a better way to do things:

Model 1: (most common credit repair company business model)

Step 1: Setup fee of $50-$200 is charged and client agrees to an additional $20-$75 per month service fee.

Step 2: Client is then instructed to order their own credit reports by mail or online and send them to the credit repair company directly.

Step 3: Credit repair company receives client’s credit reports and begins first disputing cycle (usually 30-45 days). At completion of cycle, the credit bureaus will mail updated credit reports to the client. Client must review and mail them back to the credit repair company for work to continue.

Problems with model 1:

The main problem here is that the client has paid for services before any services have actually been delivered. The credit repair company will not do any work until they have received the credit reports. So, my biggest question is what is the justification for the setup fee? The monthly fee is also questionable because whether you send in your updated reports or not, they will still continue to charge you a monthly fee even though they did not do anything for you.

The majority of complaints against credit repair companies state that the consumer was charged for services not performed. The Federal Credit Repair Organizations Act (CROA) clearly states that a credit repair company can only charge for services that have already been performed. If this is the case, why are all these companies charging before they actually perform services? Located in the fine print of most of the credit repair company contracts it is stated that the monthly fee is being billed for services performed the month prior. It is a technique that they are currently getting away with. This has not gone unnoticed by government and state officials. In fact, many credit repair companies have been shut down and fined in the past few years, but it seems that kind of action requires a large number of complaining clients.

Another problem is that many clients have extreme difficulty obtaining their credit reports. Most consumers are unaware of all the different versions of credit reports that are available today. The most effective credit reports for credit repair can only be obtained directly from each of the three major credit bureaus, Equifax, Experian, and Transunion. There are a variety of reasons the credit bureaus make it difficult to get your credit reports directly. Often clients will simply give up without even getting their reports, and now have to attempt getting their money back that they have already paid to the credit repair company.

Model 2:

Step 1: A one-time service fee of $300-$2,000 is charged upon enrollment. This is payment in full for services that have not yet been performed.

Step 2: Client is instructed to order their own credit reports by mail or online and forward them to the credit repair company.

Step 3: Credit repair company receives client’s credit reports and begins first disputing cycle (usually 30-45 days). At completion of cycle, the credit bureaus will mail updated credit reports to consumer. Client must review and mail them back to the credit repair company for work to continue.

Problems with model 2:

The number one problem here is that you are paying in full for services not yet performed. This is directly against the federal guidelines for how a credit repair company is to operate. This is how many very small credit repair companies operate because they do not have enough operating capital to perform services before payment. This means that if they do not perform services to your satisfaction, and you ask for your money back, you may find that they don’t have the money to refund you. When it comes to this type of company, it is “buyers beware”. Also note that once they have your money, there is no longer a lot of motivation for them to continue work on your credit. Will they continue to follow up with you to make sure you received your updated reports? How long are they willing to work on your case?

A better credit repair model: Now I will outline a much better model. This one puts the client first, and puts the entire burden on the credit repair company to produce results before any payment.

Step 1: Free Consultation and Credit Evaluation. This can easily be done over the phone in a few minutes, but allows for a client to determine if a credit repair program is even appropriate, get some advice about their credit, and get assistance obtaining their reports from each of the three credit bureaus.

Step 2: Credit Repair Estimate. This is also free. Credit reports are reviewed and an estimate for credit repair is provided. It is clearly laid out so that the consumer can see that they will only be charged if and when a derogitory item is corrected or deleted. There are no other fees, period.

Step 3: Program Enrollment, Payment Setup, and Begin Services. After a client has approved a credit repair estimate, is the payment arrangement setup. This is a progressive, performance-based payment model. The client makes automated deposits into a deposit account to cover any earned fees during the course of the program. Fees are only earned when the credit repair company corrects or deletes a negative credit item. If no credit items are fixed, the credit repair company does not earn any money, and the client is refunded the entire balance of the deposit account if and when they choose to cancel their program. Keep in mind that since the credit repair company assisted the client in obtaining their credit reports, they are ready to get started with the services immediately upon approval of the estimate. The client is litterally walked through each step.

An additional note about Licensing and Bonding: Currently, there are only a few states that require a credit repair company to be licensed and bonded, so most credit repair companies are not. The advantage of working with a company that is licensed and bonded is that they have passed a set of operating guidelines set forth by both the state in which they operate, as well as the insurance company that has bonded them. They have also been required to put up collateral, or show significant business capital to ensure that they can be held accountable for their client’s money. Understanding how most of the credit repair companies operate, My suggestion would be that you only work with a credit repair company that is licensed and bonded.

In my opinion, this is the only way to run a credit repair company. As you can see in the last model explained, everything is centered on the client’s needs, and requires good communication with the client throughout the program for fees to be earned. It puts the motivation on the company to provide excellent services, instead of on the client to make sure the company is doing what they are supposed to do.

I have yet to find another company doing business in this manner, and am sure the reason is because it is a lot more difficult and less profitable from a company perspective. However, doing right by the client will ensure a long-standing business, and a steady stream of referral clients. If more companies would take this responsible approach, there would not be so many claims of scams.

Now that you are armed with this valuable insight into the credit repair industry, you will be able to make a more informed decision about the credit repair company you choose.

About the Author:

Jon Ochs is the founder/CEO of NCA Credit Repair, one of the most trusted and respected Credit Report Repair companies in the nation. Visit http://www.ncacreditrepair.com for more info on credit and credit repair. Get your own completely unique content version of this article.