If you've been turned down for a mortgage refinance, you may be tempted to take a credit repair firm's offer to fix your credit score. Don't bite.
How Credit Repairs “Works”
Credit repair services promise to raise your credit score so you can refinance your mortgage. Here are some of the claims made by firms advertising on the Internet:
Deletion or Settlement of ANY Collection Agency Item!
We Remove ANY Item from Your Credit. Guaranteed!
Your Score WILL improve IMMEDIATELY!
Credit repair firms employ some rather dubious techniques in their attempts to improve your credit scores. Here is a run-down of the most common.
- Dispute every derogatory item on your report, whether it’s valid or not. The Fair Credit Reporting Act requires credit bureaus to investigate any item that you dispute in a timely fashion, and if they can’t verify the truth of the entry, it must be removed. Repair firms hit the bureaus with a deluge of disputation, hoping that they can’t verify the entry within 30 days and remove it.
- Negotiate with creditors – claiming that you’ll only pay what you owe if the derogatory information is removed from your credit report.
- Have you apply for an employer identification number (EIN) to start your credit history from scratch. It looks like a 9-digit SIN and may fool creditors. This is also called “file segregation.”
- Open accounts for you with business partners and report a satisfactory payment history.
- Add you as an authorized user to the accounts of people with good credit. You don’t actually use the accounts, and the accountholders are compensated for providing this service. This is called “piggybacking."
Credit Repair Reality
The truth is that credit repairers cannot substantially improve your credit scores by permanently removing bankruptcies, charge-offs, late payments, and other negative items. Here’s the real deal:
- Disputation: Even if an item gets deleted from one bureau’s report because it can’t be verified, that probably won’t be the case with all three bureaus. And even if you get really lucky and all three bureaus delete an accurate item because they can’t verify it within 30 days, it will almost certainly be restored during the next reporting cycle (which can be weekly, monthly, or quarterly) when the creditor continues to report the black mark.
- Negotiation: This is one tactic that can actually work. You will, however, have to pay the outstanding bill. And this is something you can do yourself.
- Apply for a new EIN: It’s illegal to apply for this number to establish a false identity. If you listen to credit repair scammers, you’ll be breaking the law. Some firms go even further, stealing the SSN of a deceased person or coaching you to apply for a new number under false pretenses.
- Establishing new credit: This can improve your score, but it takes time for a good payment history on a new account to make much impact. These accounts can be very expensive to set up as well – one name for this sort of account is “fee harvesting,” because the cost of the account typically dwarfs the amount of credit granted. This strategy is more about adding fee income to the credit repair folks than it is about improving your credit scores.
- Piggybacking: The biggest reason to avoid this tactic is that it’s very expensive and doesn’t actually help that much. There are hundreds of trade line brokers out there promising to increase your FICO by hundreds of points in days, and they usually want to be paid upfront – sometimes thousands of dollars per trade line. In addition, FICO says that its credit score formula now "includes a modification designed to help protect lenders from authorized user abuse.
Although there are authentic, not-for-profit credit counseling and debt management services, the Federal Trade Commission (FTC) claims on its Web site that is has never come across a legitimate credit repair company. There are no loopholes and no slick "programs" that can erase negative credit data if it is accurate and current.
Federal law allows credit bureaus to report all factual information for seven years (bankruptcies can be reported for ten years), and the credit con artists cannot and do not get this information removed. That’s probably why they require upfront payment.
Everything a reputable credit clinic can do for you, you can do for yourself. You are entitled to a free copy of your credit report once a year; get it at annualcreditreport.com.
You can dispute mistakes or outdated items for free. Contact the bureau that reported the inaccurate information:
- Equifax - www.investigate.equifax.com
- Experian - www.experian.com
- TransUnion - www.transunion.com
Inaccurate Credit Report? Your Mortgage Lender Can Help!
One legitimate source of credit help is your mortgage lender. Lenders work with companies called “rapid re-scorers” and these firms can get inaccurate information removed and your credit scores updated very quickly (within 24-to-48-hours) and inexpensively. The catch? You need to provide the evidence that your report is inaccurate, and you can’t do this yourself. Rapid re-scorers work ONLY with mortgage lenders.
Damaged credit can keep you from getting the lowest mortgage refinancing rates, but credit repair services are not the way to improve the picture. Take care of inaccuracies yourself, pay your debts, and check your credit every six months. You'll see progress without wasting your money on bogus debt relief.