How Can the Credit Repair Organizations Act Help Me?
People in real financial trouble can sometimes feel desperate, leaving them vulnerable to scams or questionable financial relief programs. The good news is, lawmakers have taken steps to reduce the number of credit repair scams on the market, and those steps have made a difference.
One of the most notable steps was the Credit Repair Organizations Act (CROA), which was signed into law in 1996.
“Before CROA was put in place, there were a number of deceptive practices that were going on in the credit repair industry,” said Matt Ribe, general counsel for the National Foundation for Credit Counseling. The CROA isn’t foolproof, and plenty of credit repair scams are still out there. But it has helped cut down on practices that prey on consumers.
What is a credit repair organization?
First, it’s helpful to understand what a credit repair organization is and how it’s different from a credit counseling agency. Credit repair is typically a standalone service that claims to help improve your credit score, and it’s sometimes done by “gaming” the system. That can mean opening and closing accounts or disputing legitimate items on a credit report, said Ribe.
Nonprofit credit counselors, such as those that are members of the NFCC, are not considered credit repair organizations. Credit counselors are regulated by a different piece of legislation, IRS’s 501(q) law, which prevents credit counseling agencies from engaging in credit repair.
“What nonprofit credit counselors are focused on is improving our clients’ finances and helping them repay debt and improve their financial situation, which should result in an improved score, which reflects their stronger financial position,” Ribe said. “Any effort to improve a credit score has to occur as a part of bona fide financial counseling.”
In other words, credit repair organizations might aim to provide a quick fix to improve your credit score regardless of the long-term consequences. Nonprofit credit counseling agencies instead work to improve your entire financial situation, which over time usually results in an improved credit score.
Origins of the Credit Repair Organizations Act
Prior to the Credit Repair Organizations Act, credit repair organizations would try to raise credit scores by closing accounts unnecessarily or disputing genuinely delinquent accounts on your credit reports.
Because credit history is partly based on the number of accounts consumers have and the status and age of those accounts, credit repair organizations would sometimes encourage clients to open new accounts or close existing ones. This might mean canceling a credit card you actually use, or taking out a loan you don’t truly need and the debt that comes with it, all in hopes of improving that magic number. “These sorts of transactions are only intended to have an effect on the score rather than provide somebody access to financial services that they really need,” he said.
The Credit Repair Organizations Act was put into effect to curb these sorts of deceptive practices by dictating what credit repair companies can and cannot do. While the unnecessary opening and closing of accounts is still done by some credit repair organizations to game the system, the CROA makes it a lot harder for these businesses to take advantage of consumers.
How the CROA protects consumers
Perhaps the most important change instituted by the CROA was the ban on credit repair firms requiring upfront payments. Now, credit repair organizations have to give you a written contract and fulfill every term before taking any payment, and they have to give you an opportunity to withdraw from that contract within three days. This means they can’t make false promises, and you don’t have to pay until they come through on what they said they’d do.
The CROA also regulates unfair and deceptive advertising, requiring credit repair organizations to make more straightforward claims, and penalizing them for anything deceptive or misleading. That means they can no longer promise to remove negative marks on your credit report or suggest you lie about your credit history. You also have the right to sue a credit repair organization that violates the CROA.
Additionally, the CROA prohibits certain dispute practices, making it illegal for a credit repair organization to have accurate information removed from your credit report. Before the CROA, some credit repair organizations would dispute legitimate delinquencies in hopes of getting them removed. That’s because having a delinquent tradeline on a credit report lowers the credit score and makes it less likely a creditor or lender will approve that individual.
“I don’t think it’s as widespread since CROA,” Ribe said, “but you certainly do continue to see credit repair agencies for whom a primary tactic is filing disputes that may not be meritorious.” For example, short sales and foreclosures are recorded differently on credit reports, with foreclosures more visible and often causing more damage. It’s been reported to Ribe that sometimes, when a consumer’s credit report is accidentally marked with a foreclosure instead of a short sale, certain mortgage brokers will send them to a credit repair organization that will dispute it.
This can hide the negative tradeline, which can improve the credit score temporarily. So if someone is applying for a mortgage, an initial soft credit pull for a quote wouldn’t turn up the negative mark, Ribe said. “But when you go through full underwriting for a mortgage application, it’s unhidden and the score goes back down,” he said. This is disruptive, and in some cases, deceptive, but it’s sometimes not outright illegal under the CROA. Even in the instances where it’s not technically illegal, Ribe said, it’s questionable whether it’s an effective form of consumer assistance since it’s more about gaming the system than helping someone improve their finances.
How the credit repair industry evolved since the CROA
Now that the CROA has been in place for over 20 years, the industry is in a better place than it was before, Ribe observed. However, many consumer relief companies have shifted their deceptive practices to skirt the laws.
For example, Ribe said, in the housing crisis, some credit repair agencies advertised fake programs to target vulnerable consumers, like “the Obama Mortgage Forgiveness Program.” This gave the appearance of a federally sanctioned program that the consumer could only qualify for by using that credit repair agency, but it wasn’t a real program — just an ad for their services. There are also many companies that now use robo-calling to advertise relief for student loans, though it’s not uncommon for people without student loans to get those calls. It’s not your servicer calling, he said, but a credit repair agency trying to rip you off.
Red flags to watch out for with credit repair organizations
If your credit is in bad shape, it’s advisable to use a nonprofit credit counseling agency, which will treat your finances more holistically. If you do plan to use a credit repair organization, make sure to look out for these red flags, which might indicate a scam and/or a violation of the CROA:
- You’re asked to open a new account you don’t need, or close old accounts
- They say they’re going to dispute legitimate items on your credit report
- You’re asked to pay for your services upfront
- You don’t receive a written contract
Know your rights
If you plan to engage in any sort of financial service, whether it be credit repair or credit counseling, make sure to familiarize yourself with the laws. “The important thing is to understand your rights and know that you can get a credit report at no cost and that you can get help with that credit report at no cost,” said Rod Griffin, director of consumer education and engagement at credit bureau Experian.
For consumers who have any questions about their credit, Ribe urges them to reach out to a nonprofit counselor, which offers services that are either free or affordable. “A credit counselor can walk them through not only their credit, but their finances as well and how the two work together for financial fitness,” he said.