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3rd Party Credit Help: Be Wary.

by Morgan on April 9, 2008

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This post is from the Blown Mortgage Hall of Fame.  It originally appeared back in July 2007 on my series on credit.  Now more than ever your credit score is vital to securing financing.  I’m on vacation from Saturday until Tuesday the 15th so enjoy some of the classics while I’m gone. 

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In part 1 of this series on credit we talked about how important credit has become in surviving the current home depreciation environment and avoiding the ARM Reset Foreclosure Trap. In part 2 of the credit series we looked at the elements that comprise your credit score. Part 3 covered improving your score on your own and outlined the importance of credit management and protecting your credit report. In this part of the series we?ll look at options for improving your credit using third party services.  Here is a recap of the series so far and where we are at to date:

Credit Series Overview

  1. Why credit is so important
  2. Understanding elements of credit
  3. Improving your score organically
  4. Improving your score using 3rd party help
  5. Managing your score

A note before we begin. Before you agree to work with any third party to improve your credit score you need to do the following things:

  • Know and understand your current score, and understand the items on your credit report. You can do this by signing up for MyFICO, an inexpensive, accurate way to keep tabs on the accuracy of your credit report.
  • Know and understand what is legal and what is illegal when it comes to credit repair.
  • Check with the Better Business Bureau for any third party you choose to work with.
  • Carefully examine the fees charged and the results guaranteed by the party you choose.

How to Avoid Scams

Just like in mortgage, if it?s too good to be true, it probably is. Ignore any company that makes any of the following claims:

  • We can erase your bad credit – guaranteed!
  • We can remove bankruptcies and judgments permanently!
  • Get new credit instantly!
  • Form a personal corporation and get all the credit you need, now!

These all represent untrue statements about credit repair. You are setting yourself up for disappointment if you do business with these types of firms.

Your Rights When Engaging a Credit Repair Service

From the Federal Trade Commission Web site on Credit Repair:

By law, credit repair organizations must give you a copy of the ?Consumer Credit File Rights Under State and Federal Law? before you sign a contract. They also must give you a written contract that spells out your rights and obligations. Read these documents before you sign anything. The law contains specific protections for you. For example, a credit repair company cannot:

  • make false claims about their services
  • charge you until they have completed the promised services
  • perform any services until they have your signature on a written contract and have completed a three-day waiting period. During this time, you can cancel the contract without paying any fees

Your contract must specify:

  • the payment terms for services, including their total cost
  • a detailed description of the services to be performed
  • how long it will take to achieve the results
  • any guarantees they offer
  • the company?s name and business address

I have heard horror stories of people sending thousands of dollars to ?credit repair? companies only to find their situation unimproved and their precious cash squandered on false hope. Do not let this happen to you. As with all financial situations do not rush in to a decision; and always get a referral if possible.

Types of Third Party Credit Repair Companies

Consumer Credit Counseling - These companies take all of your outstanding debt, analyze the creditors, balances and interest rates compared to your monthly income. They then negotiate with all of your creditors to reduce your overall debt and monthly payments. While this sounds good; it really looks bad on a credit report. This is a red flag to an underwriter reviewing your credit history. Some banks will consider this almost as negatively as a bankruptcy. While it may be beneficial to consult with a credit counselor to help game plan a way out of your debt; it can be very costly to your future credit options should you engage them to restructure your outstanding debt.

If you choose to work with a credit counselor simply use them to help remove disputed items that appear on your report. They can provide you templates and contacts to help you remove incorrect information on your report.

Consumer Law Offices - Lawyers like to tout that they are more effective than credit counseling companies because, well, they are lawyers. The truth is that they take the same steps as everyone else to remove disputed items. There is nothing inherently bad about using a law firm to remove credit items that are erroneous; its just that they don?t have different avenues than other organizations that may be less expensive.

Individual Credit Counselors - There are many independent ?credit experts? who offer services to repair or improve your credit score.  They may be former employees of the above types of firms or not.  As long as you use the same precautions in researching and selecting them as the above companies they can be a reasonable alternative to the above.

The Best Alternative?

Most people turn to third party companies when they are desperate and in need of help.  This is the wrong time to begin to work on your credit profile.  The best bet may be to do it yourself.  Using a copy of your credit report and some template correspondence you can effectively clean up your credit report with out having to pay the fees associated with the above services.  The bottom line is that, all things considered, being your own credit counselor may be your best bet.

If you?d like samples of the template letters you can use to dispute items on your credit report please email me at morganb@blownmortgage.com and I?ll be happy to send them to you.  if you?d like a detailed white paper on how your credit score impacts your home financing options please email me as well.  Much of this information is based on the FTC?s Consumer web site on Credit Repair – you can learn more byvisiting the FTC site.

Last 3 posts by Morgan

Related posts:

  1. Credit Series Part 4: Improving Your Score with a Third Party
  2. Credit Series Part 5: Managing Your Score
  3. Credit Series Part 3: Improving Your Credit Score Organically
  4. Credit Series Part 2: Elements of Credit
  5. Do It Yourself: Improve Your Credit

  • People should know that accurate information cannot be removed from a credit report unless the creditor requests it be done (stating that it was a mistake). Some creditors are willing to do this in a pay-for-deletion arrangement. These are a bit tricky, so the consumer should do some research prior to executing such an agreement. However, they are often the best way to boost credit score, literally overnight. The deal must be in writing with the creditor, not with the collections agency, as they have no authority to execute such an agreement. It's basically, "I'll pay you this if you'll delete all negative marks on my credit" sort of an arrangement.
  • Frank
    Sorry you are wrong about 3rd party credit companies. A friend of mine used one, they went through his credit history and for every ding against him they contacted the reporter and requested certain documentation they are legally required to have in order to ding a persons credit. Only about 10% of the people responded with it, and some didnt do it correctly, so almost all the negative things were stricken from his credit report. His score went from ~640 to ~750. It cost him a few hundred dollars.

    You are way off base on this one.
  • Morgan - I think it's a bit naive to think that Attorneys, while they may take some of the same steps to repair someone's credit, don't get better results. For example, as the owner of a small collection agency, would you respond to a letter from a consumer the same way as you would a letter from an Attorney, on the Attorney's letterhead? My guess is you would take the Attorney's letter much more seriously.

    There are also other benefits associated with a quality credit restoration service related to establishing new lines of credit, financial & legal counseling, etc.

    Going thru the steps of credit restoration on one's own is easy -- getting results isn't.
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