Beware of companies that offer credit repair services

Anyone whose credit score has been affected by late payments or financial difficulties can understand the appeal of a quick solution that clears up their tarnished credit score. But beware of the companies that offer credit repair services over the phone and charge upfront fees.

The Consumer Financial Protection Bureau reached a $2.7 billion settlement in August with PGX Holdings, a group that includes Progrexion Marketing, which operated a major credit repair operation under brands such as Lexington Law and CreditRepair.com.

Credit repair companies typically bombard credit bureaus with dispute resolution letters in the hopes of getting negative reviews removed, said Andrew Pizor, a senior attorney at the National Consumer Law Center. (The bureaus can ignore disputes that don’t come directly from consumers, he said.) Occasionally the repair companies’ efforts can work, Pizor said, but the benefit is often temporary. If you have stopped repaying a loan, this information will appear back on your report when the lender sends an update to the credit reporting agency.

If the negative information is accurate, there is generally no way to have it deleted, Pizor said. Negative information like missed or late payments stays on your credit report for seven years, and a personal bankruptcy stays there for 10 years. Paying for credit repair, he said, is “really a waste of money for the vast majority of people.”

Consumers have the right to dispute errors on their credit reports and have the errors corrected promptly – even though this can sometimes be frustrating. “Our view is that people shouldn’t have to pay to third parties,” said Jonah Kaplan, senior program manager for consumer reporting markets at the consumer bureau. “You can do it yourself for free.”

The consumer bureau’s settlement stems from a lawsuit the bureau filed in U.S. District Court in Utah alleging that the companies charged illegal upfront fees for credit repair services sold via telemarketing, in violation of federal law. Credit repair companies cannot charge or receive fees until six months after they produce results for the customer, the bureau said. In March, the court ruled in favor of the office.

It’s uncertain how much money consumers will see from the settlement. PGX Holdings filed for bankruptcy protection in June. The consumer agency said in a statement about the settlement that the agency’s victim assistance fund may be used to make payments “to those harmed by the perpetrators.”

As part of the settlement, the companies were barred from telemarketing credit repair services for 10 years and must inform their customers of the settlement and explain the process for canceling the service.

Eric M. Kamerath, a spokesman for PGX Holdings, said the company “will continue to abide by the court’s decision while helping consumers who would otherwise live with inaccurate and unsubstantiated credit reports.”

The settlement is the latest salvo in the bureau’s crackdown on credit repair companies. In a statement, its director, Rohit Chopra, called credit repair companies a “scam.” The Federal Trade Commission also recently took action against them.

With credit card debt defaults reaching pre-pandemic levels, the National Foundation for Credit Counseling has seen a “continued increase” in demand for credit counseling services since spring 2022, said Bruce McClary, a spokesman for the foundation. Reports from its member agencies said both advisory activity and enrollments in debt management plans have returned to pre-pandemic levels.

Some background information: The three major credit reporting agencies – Equifax, Experian and TransUnion – record details about your payment history in credit reports. They provide the reports to banks, lenders and other companies who use the reports to decide whether you are a good credit risk. If you default or default on a debt, it will show up on your reports and affect your credit score – a three-digit summary of your creditworthiness – making it more difficult to qualify for new loans at favorable rates.

If you’re having trouble repaying your debts and your credit is impaired, an alternative is to seek advice from a nonprofit consumer credit counseling agency, Pizor said. Such groups can assess your financial situation and, if you qualify, develop a debt management plan that will allow you to pay off your debts over time, usually within three to five years. Some agencies may charge a fee, which is offset by a lower interest rate negotiated by the agency.

Research on borrowers who took advantage of their credit card companies’ payment holidays during the pandemic and then enrolled in nonprofit debt management plans had a significantly lower risk of default than similar borrowers who did not participate in such plans, said David Silberman, a senior fellow at the Center for Responsible Lending.

However, he said consumers should be skeptical of debt settlement companies because they typically encourage consumers to stop making payments to their lenders. Instead, borrowers send money to the settlement company, which uses the funds to persuade the lender to settle by accepting less money than is owed. (The company takes a share.)

But if the effort isn’t successful, customers may end up with worse credit scores than they started with, Silberman said. “They dug a deeper hole,” he added.

If a credit counseling company believes you don’t earn enough to pay off your debts in a reasonable amount of time, personal bankruptcy – a legal process designed to relieve debts you cannot pay – could be an option. However, this is a serious step as it may be difficult to access credit years later.

Here are some questions and answers about dealing with debt:

Q: How do I find a reputable credit counseling agency?

A: You can search online at the National Foundation for Credit Counseling. In addition, the Department of Justice maintains a list of agencies approved to provide pre-bankruptcy counseling. These groups often offer other services, including credit counseling and debt management plans.

Q: Are there credit cards and loans that can improve my credit score?

A: Some banks and credit unions offer secured credit cards that allow users to make a refundable cash deposit – usually a few hundred dollars – that serves as security for purchases made with the card. Ultimately, cardholders can build a repayment record that improves their credit score and allows them to upgrade to a traditional card with a higher credit limit. Discover and Amazon are also among the secured card providers.

Another option could be a “credit builder” loan, which is offered by both community banks and online lenders. With credit building loans, the lender usually deposits your money into a separate savings account. You will receive the money – usually minus a fee – after you make monthly payments equal to the original amount.

Q: What is the best way to protect my credit?

A: Paying your bills on time and keeping your credit utilization low – meaning not using up your cards – can help you maintain a good score. You should also check your credit reports for errors. On a special website, www.annualcreditreport.com, you can get reports from the major bureaus for free – even weekly until the end of this year.

This article originally appeared in The New York Times.