We'll repair your credit, guaranteed!
Correct negative information on your reports!
Excellent for late payments!
Credit repair companies, which are rampant on the Internet, appear to be providing a wonderful service. Just imagine -- negative items on your credit report could be wiped out with only a few easy payments.
Websites that claim to erase bad credit usually are operating outside the law and seldom get tangible results, according to the Federal Trade Commission and other agencies.
Even credit repair companies that stay away from some of the most bogus of claims -- including promises that they can wipe out legitimate reports of late payments -- break the law as soon as they charge upfront "registration" or "setup" fees.
In all, the FTC has gone after about 70 credit repair companies. Last year it went after 20 of them at once in a crackdown called Project Credit Despair.
Still, that's only a small number of the companies that offer the service, according to the director of the FTC's Midwest region, Steve Baker, who spearheaded the project.
"I remember the head of our consumer protection bureau saying a few years ago [that] she had never seen a legitimate credit repair company," Baker said. "And I don't think we have yet."
Credit repair companies should not be confused with those that do debt counseling, which is a different business (although the FTC and other agencies have gone after some of them too).
The first thing a credit repair company usually does is obtain reports for the client from the major credit reporting bureaus. And for this, they sometimes charge a fee.
If that's all they do, no law has been broken, although they often avoid -- at least on their websites -- letting clients know that the reports can be easily obtained for free by anyone once a year.
But if the next step for "repair" work involves a payment, then the company is violating federal and California laws.
"They can't charge money until the services they promise have been performed," said Gayle Weller, a government program analyst in the California attorney general's office.
"If all they say is that they're going to write letters of dispute for you to challenge some of the negative items in the report, then they can get paid after they write the letters."
That state law -- enacted in 1984, long before the Internet was in general use -- applies not only to California-based credit repair companies but also to those that do business with anyone in the state. The 1997 federal law has many of the same provisions, including no payment before work is completed.
But you wouldn't know that by looking at credit repair websites. Almost all of them charge an initial fee that can be as low as $20 and as high as $100. Additional fees usually follow and can amount to several hundred dollars over time.
Then there's the question of what these companies do for their fees. If a credit repair company's main role is to challenge items on a report that might well be inaccurate, then its service is hardly worth paying for.
The credit reports that come from the free, no-strings website AnnualCreditReport.com (not to be confused with numerous commercial sites that eventually charge for report services) enable consumers to dispute inaccurate information online or by mail.
And those challenges can reap results.
"There are real mix-ups," Baker said. "A charge is made under a wrong name, a bill that was paid is still on there. Under the law, you have the right to have those fixed."
But if dings -- late payments, outstanding bills or a bankruptcy -- are accurate, there is no legal right to get them removed.
That's where errant credit repair companies cross the line.
Bad Credit B Gone is one company that was charged by the FTC as part of Project Credit Despair. It promised it could deliver "the credit you always dreamed of" by wiping out 80% of the negative information on a report within three months.
"They claim there is some kind of loophole that allows them to get this stuff removed," Baker said.
"What these companies do is dispute all the negative information on the credit report, with no documentation or anything like that saying the information is wrong."
The law requires credit bureaus to verify information that is correct. That's a loophole some credit repair firms say they are able to exploit to their clients' advantage.
There was no loophole for Bad Credit B Gone. It was ordered by a federal court to pay fines and restitution and was barred from claiming that it could remove negative yet accurate information from reports.
But the loophole pitch lives on. DSI Solutions, another online credit repair company, says on its website, at www.repairyourbadcredit.com, that when a credit bureau is challenged on a negative item, "The fact is, either they'll not respond with the right evidence or not bother with our dispute at all.
"Then just like that, the three months of late payments, according to your credit record, never even happened."
Not true, Baker said. A credit bureau doesn't commonly roll over like that. And most negative items can be verified electronically in seconds.
Scott Elhenicky, chief executive of Chicago-area-based DSI Solutions, declined to discuss the company's practices.
The FTC usually doesn't go after a credit repair company unless it receives complaints. And it gets only a relatively small number of these.
"In general," Baker said, "about 92% of people caught up in frauds never complain. And in credit repair, it's much worse.
"They are so embarrassed -- they have got themselves in financial trouble and they don't want to talk about it."
The lure of an almost-magical solution is too great to pass up, even for those who are otherwise rational.
"Almost universally," Baker said, "these are people down on their luck. It could be a divorce, major medical bills, losing a job. It could be any of us.
"And that's when you get victimized."