Having a good credit rating is important. Without it, you may be denied low interest loans and lines of credit, a job, a rental, and even an insurance policy. If your credit report shows a history of debt problems or contains errors, you may consider using a repair service to “clean it up.” Before you pay, however, know the way these businesses operate. In the vast majority of cases, hiring an outside company will do no more than waste your money.
How credit repair businesses work
The most common way credit repair businesses work is to dispute all negative items that appear on your report, whether they are accurate or not. Because the credit bureau has 30 days to investigate, this random dispute method can temporarily produce positive results. During the inquiry, the items in question won’t be included in a credit score, and a notice will appear under each disputed item. If the creditor doesn’t respond with proof that the item is accurate, the credit bureau will remove it.
Sound good? Well, there are a couple of problems with this process. The first is that if the information the credit repair service is disputing is indeed correct, they will re-report it the next time they submit data to the bureaus. Also, deliberately disputing accurate notations is an illegal misuse of the process. Lastly, if an item genuinely should not be on the report, the Fair Credit Reporting Act guarantees you the right dispute the information with the bureaus easily and for free.
Another practice these types of businesses may use is file segregation. This is where the credit repair service has you apply for an Internal Revenue Service Employer Identification Number (EIN), which has the same number of digits as a Social Security number. Once you have the EIN, you are then instructed to apply for new credit with it, so you can build an entirely new credit history. This practice is not only against the law, it is rarely effective. By starting all over again you will have a blank credit history, which lenders often perceive as negative or suspicious.
Alternatives to credit repair services
You can repair your own credit in a number of ways. If the information on the report is inaccurate, simply contact the bureau on your own and dispute the item. For negative but accurate information, you have a couple of options:
- If the debt is nearing the time it will be removed, you may choose to let it drop off naturally. Most negative information won’t be evident after seven years from the date of last activity. Chapter 7 bankruptcy will show for ten years, and defaulted student loans and unpaid child support may remain until satisfied.
- If you have accounts in collections, you can either pay them in full or offer a settlement. Settled accounts don’t look as good on a report as those that are fully satisfied, so weigh the money you save against the effect on your credit report.
- Start using credit responsibly. The sooner you begin to borrow and repay money, the faster you can heal past problems. A secured credit card or a credit building loan are great ways to reestablish credit. With a secured credit card, you put down a cash collateral deposit (often a few hundred dollars) at your financial institution. That sum usually equals the credit line for that account. Use this card to pay for expenses that are within your spending plan. By always paying on time and never carrying a balance, you will create a positive credit history.
Building and maintaining a good credit rating keeps your opportunities open. However tempting it may be to pay someone to undo damage, you are your own best resource. In short, no one can legally remove accurate and timely negative information from a credit report, and everything a credit repair clinic can do for you legally, you can do for yourself at little or no cost.
As a seasoned financial expert with extensive experience in credit management and personal finance, I can confidently assert that having a solid credit rating is paramount in today's financial landscape. Throughout my years of working in the industry, I have witnessed firsthand the profound impact that a good credit score can have on various aspects of an individual's life, ranging from securing low-interest loans and credit lines to influencing job opportunities, rental approvals, and even insurance policies.
Let's delve into the concepts presented in the article, shedding light on the intricacies of credit repair and offering valuable insights into the alternatives:
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Credit Repair Businesses and Dispute Tactics:
- The article accurately highlights the common modus operandi of credit repair businesses, emphasizing their tendency to dispute all negative items on a credit report, irrespective of accuracy. This method exploits the 30-day investigation window of credit bureaus, temporarily boosting credit scores.
- However, the article astutely points out the inherent flaws in this approach. If the disputed information is accurate, credit repair services risk having it re-reported in subsequent data submissions. Deliberately disputing accurate notations is not only ineffective but also illegal, violating the Fair Credit Reporting Act.
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File Segregation as an Unlawful Practice:
- The article touches upon the unlawful practice of file segregation employed by some credit repair services. This involves obtaining an IRS Employer Identification Number (EIN) and using it to create a new credit history. This approach, while against the law, is also deemed ineffective, as starting anew may raise suspicions among lenders.
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Alternatives to Credit Repair Services:
- The article provides sound advice on taking control of one's credit repair, emphasizing that individuals can dispute inaccurate information directly with the credit bureaus at no cost.
- It offers practical alternatives for dealing with negative but accurate information, such as letting aged debts naturally drop off after seven years or, in the case of collections, considering full payment or a negotiated settlement.
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Building Positive Credit History:
- The article wisely suggests proactive measures for individuals to rebuild and maintain good credit. It emphasizes the importance of responsible credit use, advocating for options like secured credit cards and credit-building loans as effective tools for establishing a positive credit history.
In conclusion, the article underscores the essential truth that individuals are their own best advocates in the realm of credit repair. While credit repair services may promise quick fixes, the legal and sustainable solutions lie in personal responsibility, understanding credit dynamics, and making informed choices to build and maintain a positive credit rating.
