How does credit repair work & which tactics should you avoid?

By Louis DeNicolaJanuary 21st, 2016Managing Credit and Debt

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If you have poor credit, your ears likely perk up when you hear or see ads for credit repair companies. You may be enticed by offers to increase your credit score, remove negative marks from your credit file, or create a new credit identity.

Some credit repair services may be able to help improve your credit, but the industry has a bad reputation for engaging in illegitimate, and sometimes illegal, activity. We’ve previously discussed the right way to fix your credit, but it’s equally important to be knowledgeable of the misleading tactics, so you don’t fall prey to them. Be cautious before working with a credit repair agency and remember that any legitimate actions that they can take on your behalf, you can do yourself for free or cheap.

Credit Repair Tactics

The following four tactics are methods that some less reputable companies may promote or use.

Piggybacking

Piggybacking refers to the practice of adding someone to another healthy credit file, often by making them an authorized user on someone else’s credit card. Depending on the card’s issuer, authorized users may be reported to the credit bureaus as if the card is their own. The authorized user’s credit file gets filled out with the card’s history and ongoing use.

This can be a legitimate way to establish and build credit, but it comes with risks. First, you’re tying your credit to another person’s actions. If the primary cardholder misses a payment or has a high utilization rate, your credit may be affected. The opposite of this holds true as well.

If you try this tactic on your own, say with a family member, remember that the primary cardholder is putting their finances at risk by adding an authorized user if they give that user the means to make purchases (ie a credit card). If significant spending is put on the card, but the new authorized user can’t pay, the primary cardholder might be forced to choose between paying someone else’s bill or taking a credit score hit.

The latest credit scoring methodologies also have measures in place to detect authorized users that are trying to game the system. If you’re added as an authorized user to a non-family member’s account – a tactic some credit repair companies use – it may have little effect on your score.

Tradelines

Piggybacking is sometimes referred to as adding “seasoned tradelines,” so be on the lookout for that terminology. The same rules apply, and the “tradeline” is just a line of credit (like a credit card) that gets added to a consumer’s file, even though they are not the primary user. Hiding the tactic behind clever terminology like this makes it harder for consumers to decipher, much like the use of “credit enhancement” as opposed to “credit repair.” Make no mistake about it, though, these services are ethically questionable, expensive, and in some cases fraudulent.

Jamming

Jamming is a tactic employed by some credit repair agencies to overwhelm the credit dispute process and hope something slips through the cracks. It relies on the fact that credit reporting agencies must review and verify disputed items within 30 days or remove them from a credit report.

By jamming the system sometimes you can remove legitimate negative marks from your credit report, but it’s an illegal and temporary “fix” at best. Only inaccurate or untimely information can legally be removed from a credit report according to the Federal Trade Commission (FTC). If jamming results in a negative mark being removed from your report, the correct information will be added back to your file once the creditors report it again – something they typically do once a month.

Disputing Accurate Debts

A credit repair company may suggest you directly challenge accurate negative marks on your credit report with methods other than jamming. To do this, you may need to falsely claim you’ve been a victim of identity theft, obtain a police report, and use that to dispute a debt on your credit report. In some cases, credit repair agencies may falsify or obtain police reports on a paying client’s behalf.

If there’s an incorrect debt or derogatory mark that shouldn’t be in your credit report, you definitely should dispute it, and your credit may rise as a result. But, if a credit repair company disputes, or asks you to dispute, accurate information in your credit file that’s a sure sign it’s not a trustworthy company.

A better bet might be for you to write a goodwill letter to address negative marks.

File Segregation

File segregation involves creating and using a new credit file. In theory, this may sound like a good idea, but in practice it’s illegal.

If you’re told to apply for an Employer Identification Number (EIN) and use it – instead of your Social Security number – to obtain a new line of credit, don’t do it. It’s illegal to obtain an EIN under false pretenses, and you may be breaking federal and state laws by lying on a credit or loan application.

Some credit repair agencies may also offer to sell you a new credit profile, privacy, or protection number (CPN). These numbers are often stolen Social Security numbers, and using one may be illegal.

How to spot disreputable credit repair companies

Signed into law in 1996, the Credit Repair Organization Act (CROA) was partially in response to the use of illegal and deceptive practices by credit repair organizations. There are now clear guidelines that dictate what credit repair organizations must tell you and what they can and cannot do.

Don’t trust a company that advises you to dispute legitimate debts or negative marks, or tells you that they can get you started with a new credit file.

Additionally, the company should:

• Provide you with a written contract that details the credit repair services offered.
• Tell you the total cost of the services.
• Never charge you before performing the service.
• Give you at least three days to cancel without charge.
• Not promise to get rid of negative credit information that is accurate and current.
• Not guarantee an increase in your credit score.
• Not ask you to forfeit your CROA rights.

Credit repair agencies may be able to help, but they are not typically worth the cost.

Not all credit repair organizations are inherently bad or scams, but you can do the legitimate services they provide for cheap or free. This generally involves identifying and disputing negative and inaccurate, incomplete, or untimely marks that are on your credit reports.

The primary service legitimate credit repair companies offer is handling the dispute and request process for you. Some companies also upsell credit monitoring services or ongoing credit improvement recommendations. The services can cost hundreds to thousands of dollars as a one-time charge, or ongoing subscription services can range from about $20 to $100 a month. The subscription services also often charge an initial fee to analyze your credit report or get you started in their system.

You’re probably better off monitoring your own credit or doing some independent research on affordable and trustworthy monitoring services outside of referrals from these sorts of firms.

Try It Yourself First

If you’re overwhelmed or want to pass on the work to someone else, finding and hiring a legitimate credit repair company may seem like a good option. However, the industry is filled with disreputable companies and practices, and you should thoroughly research a company before handing over payment or personal information. It’s probably better to do it yourself first, and then reevaluate whether you need professional assistance.

Not sure how to read your credit report and want a little guidance? There are free resources available. Reputable credit counseling organizations like Clearpoint can at least get you started with free guidance and recommendations to help determine next steps.