Beware of Credit Repair Advance Fees: Protect Your Rights

Seeing the best in people is admirable. But when dealing with credit repair companies, you need to be cautious. Recent events have exposed illegal practices in the credit repair industry. Many consumers now understand their rights: credit repair companies cannot charge fees up front.

Here’s what happened and how you can protect yourself.

What Credit Repair Companies Actually Do

Credit repair companies help clients improve their credit scores for a fee. The process is usually straightforward.

These companies contact credit bureaus and work to remove negative items from your credit report before they naturally expire. Here’s how it works in practice.

Example: Chloe checks her credit report and discovers three late payments from two years ago. These marks are dragging down her score. Late payments typically stay on your report for seven years. But Chloe needs a car loan within the next year. She hires a credit repair company to help. The company contacts the credit bureaus and successfully removes the late payments. Chloe’s credit score rebounds.

Credit repair doesn’t always work this smoothly. Results vary widely from case to case. That’s exactly why advance fees are illegal.

Federal Law Prohibits Upfront Credit Repair Fees

The United States has strong consumer protection laws. The Credit Repair Organizations Act specifically regulates credit repair companies.

Key provisions include:

• Credit repair services cannot charge customers anything before performing services
• All contracts must be in writing with clear terms
• Consumers can withhold payment if results don’t meet contractual promises
• Companies must disclose consumer rights before signing any agreement

The law is crystal clear about advance fees. Yet some companies still violate these regulations. They prey on consumers who don’t know their rights.

Major Credit Repair Companies Faced Massive Lawsuits

In late 2023, the credit repair industry faced a major scandal. The Consumer Financial Protection Bureau (CFPB) took action against several large companies.

CreditRepair.com and Lexington Law reached a $2.7 billion settlement with the CFPB. Both companies were banned from offering credit repair through telemarketing for 10 years.

The violation? They charged consumers illegal advance fees through telemarketing operations.

The Fee Structure That Broke the Law

Individual fees seemed small at first glance. New customers paid a $15 sign-up fee upfront. Two weeks later, monthly charges of $15 began.

But these companies had more than four million customers. Those illegal fees totaled $3.1 billion.

The contracts made things worse. Every customer signed agreements stating the company guaranteed zero results. Customers paid for effort, not outcomes. The companies collected advance fees while promising nothing in return.

Additional Questionable Practices

The companies also referred customers to outside rent-to-own housing businesses. They encouraged consumers to use their credit repair services first. The promise? Better rates on homes from their partner contractors.

How to Spot Unethical Credit Repair Companies

Protecting yourself starts with one simple rule: never pay advance fees. However, dishonest companies use sneaky tactics to hide their intentions.

The CFPB identifies these red flags:

• Claims they can remove all negative information, even accurate reports
• Suggestions to create a new credit identity or use false information
• Refusal to answer basic questions about costs or specific services
• Guarantees of specific results like exact score increases
• Pressure to sign contracts immediately without review time
• Requests for payment before any work begins

Trust your instincts. If an offer sounds too good to be true, it probably is.

Better Alternatives to Credit Repair Companies

You don’t need to pay for credit repair. Many strategies work just as well.

Start by requesting your free credit reports from all three bureaus. Review them carefully for errors or outdated information. You can dispute inaccuracies directly with the credit bureaus yourself.

Focus on building positive credit habits moving forward. Pay all bills on time. Keep credit card balances low. Avoid opening multiple new accounts at once.

If you’re dealing with debt in collections, our partner Solo can help you respond properly. They provide tools to validate debts and negotiate settlements.

Consider working with our partner Cambridge Credit Counseling for legitimate debt management plans. They offer nonprofit credit counseling services that can lower interest rates and consolidate payments.

What to Do If You’ve Been Charged Illegal Fees

If you paid advance fees to a credit repair company, you have options. File a complaint with the CFPB through their website.

Document everything. Save contracts, emails, receipts, and records of all communications. These documents support your complaint.

You may be entitled to a refund. The CFPB’s enforcement actions often include consumer restitution. Check if the company you used is part of any settlement.

Consider consulting with a consumer protection attorney. Many offer free consultations for cases involving illegal fees.

Your Rights Under Consumer Protection Laws

You have powerful rights when dealing with credit repair companies. Understanding these rights helps you avoid scams.

Credit repair companies must provide a written contract before you pay anything. This contract must explain your cancellation rights. You have three days to cancel any agreement without penalty.

Companies cannot make false claims about their services. They cannot guarantee specific outcomes. They must disclose that you can dispute credit report errors yourself for free.

If a company violates these rules, you can take legal action. You may recover damages plus attorney fees.