Tips for Avoiding Credit Repair Scams

Because of the financial crisis occurring in today’s economy, many families are struggling with the inability to pay their bills. With the mounting debt in the homes of many Americans, there has been an abundance of new companies focusing on credit repair.  The emergence of the growing problem of mounting debt in homes across the nation has given way to credit repair scam companies looking to take advantage of people in their struggle times.

Companies promise to improve credit scores, decrease minimum payments, get lower interest rates and even cut the amount due by more than 50%.  However, the cardinal rule for these companies is that if it seems too good to be true, it probably is.

The actual process these companies use and the fine print of the contracts actually do more to damage credit than repair it.  It’s important to understand the characteristics of a credit repair scam so that you won’t be one of the many other Americans who have fallen victim to them.

Preying on families who are already drowning in debt and unable to pay their bills, credit repair companies promise to consolidate all their bills into a low monthly payment. They agree to negotiate with the credit card companies, so that the families no longer have to hassle with dealing with the constant phone calls.

Families are instructed to stop making any and all payments on their bills and instead, make a monthly payment to the credit repair company. The credit repair company will then negotiate with their creditors to settle out for a portion of the total amount due.

However, with every month that goes by the creditors tack on late fees and missed payment fees to the total amount due. By the time the credit repair company actually does settle out for a portion of the total amount, the amount is doubled or sometimes tripled the original amount owed. 

Then, the settlement payment must be made out of the funds you have been sending to the credit repair company each month. However, the fee the credit repair company takes out of your payment each month doesn’t allow for you to actually create a surplus of money to use on the credit card settlements. So, you are incurring additional fees for not making the payments, you have to make a lump sum settlement payment (which usually takes a number of months depending on how high the original amount owed is) and your credit score is permanently damaged for not making timely payments.  The worst part of this scenario is that at the end of the tax year you will have to pay a tax fee for settling out a debt.  Each fee is different depending on the settlement amount but for a $1000 bill the fee could be as much as $300, which is taken out of your tax return.

The negotiation of minimum payments and refinancing does not have to be done by a credit repair company.  Many creditors are willing to work with struggling families and a simple phone call can save you hundreds of dollars on your monthly payments or even obtain a lower interest rate.

Credit repair scam companies prey on the fact that many families are unaware of what their options are when they are struggling to pay their bills. 

In fact, many companies will never opt to settle out for a portion of the total amount due. So, on top of getting the harassing calls every day about why you haven’t been sending in your month payments, you will undoubtedly receive a summons to appear in court. Larger accounts with creditors will be sent to arbitration. On top of pricey mandatory court fees just for showing up to the summons, a judge can determine the amount be paid through wage garnishment. 

These credit repair scams can seem like an easy fix to your financial struggles, but in reality they cause more harm to both your credit and your finances.  Masquerading as legitimate businesses it can be hard to see the scam in many of the companies being advertised. That’s why it’s even more important to understand exactly what you’re signing up for when dealing with a credit repair company. 

Many credit repair companies are already engaged in lawsuits with their previous customers because of the exorbitant fees they charged their customers for supposedly fixing their credit. Instead, many Americans faced litigation from their creditors, wage garnishment and an even deeper foothold into debt.

Make sure to fully read and understand any contractual agreement given to you by a credit repair company.  Also, use your common sense to listen critically when being told the process of fixing your credit. Always remember that if it seems too good to be true, it probably is!