Credit repair: Why credit counseling may be a better answer

Most of us need credit. Unless you're born into a family with wealth or have had time to save up, you probably can't buy a house or a car without credit. But credit is a double-edged sword, and it's easy to get into credit trouble.

If you find yourself deeper in debt than you ever imagined, credit repair or debt settlement companies may seem like your knights in shining armor. Here's their pitch: On your behalf, debt settlement companies will contact your creditors and negotiate a lower balance — usually pennies on the dollar — and credit repair companies will attempt to have negative items removed from your credit report.

If it sounds like a fairy tale, it probably is. There are some major problems with debt settlement companies and credit repair companies.

Read on to learn about the truth of credit repair and debt settlement services — and your alternatives for paying off debt or repairing your credit. You don't have to go it alone; nonprofit credit counseling services can help.

How debt settlement services work

For a fee, debt settlement companies offer to settle your debts with your creditors. In other words, they attempt to get your creditors to agree to accept less than the amount you owe.

How do debt settlement companies settle debt? They have you save a lump sum in an account that's under your control. The account belongs to you and is administered by an independent third party. You're entitled to withdraw funds from your account any time without penalty, according to the Consumer Financial Protection Bureau,^{See note1} or CFPB.

There are a few problems with this arrangement. First, your creditors aren't required to deal with debt settlement companies, so there's no guarantee the negotiation they promise will ever take place. And because they usually don't have an up-front agreement with creditors, the creditors may not honor any sort of agreement.

These debt settlement companies may give out questionable advice. They may tell you to stop communicating with your creditors or to stop making payments while they're negotiating. Meanwhile, you're accumulating late fees, which damages your credit history, and you could even be sued.

Debt settlement advice

If you've already contacted a debt settlement company, be aware of your rights. The Federal Trade Commission defines "specific provisions to curb deceptive and abusive practices associated with debt relief services."^{See note1} For example:

• Companies can't charge you any fees before services are provided.
• Companies have to disclose information about their services before you sign up, such as how long it will take them to get results and how much they'll charge you.
• Companies have to let you know about the negative consequences you could incur by using their debt relief services.

If you're working with a company that made promises that sound too good to be true, chances are, it's a debt relief scam. Read more about important rules in the FTC article Debt Relief Services & The Telemarketing Sales Rule: A Guide for Business.^{See note1} You can also read the CFPB's article, What's the difference between a credit counselor and a debt settlement or debt relief company?^{See note1}

How credit repair services work

In exchange for payment, a credit repair company attempts to get information removed from your credit report. Like debt settlement companies, credit repair companies are for-profit, and they claim to help you improve your credit.

While these companies say they're helping their clients remove inaccurate information from their credit reports, they may also be trying to get negative, accurate information removed from their credit reports. Negative information naturally falls off a credit report after seven years, but credit repair services attempt to remove it sooner.

According to the federal Credit Repair Organizations Act, or CROA, which was enacted in 1996, credit repair companies are not allowed to ask you to:

• Make false statements to credit reporting agencies.
• Change your information, giving you a "new credit identity," so credit bureaus won't associate you with your credit information.
• Charge any fees before providing services in full. According to the CFPB, "If the company uses telemarketing, such that the Telemarketing Sales Rule applies, the company may not request or receive fees until it has provided you with a credit report generated more than six months after the promised results that shows the results."

Credit repair advice

You have the right to dispute your own credit report information for free. You don't need the help of a credit repair service. In fact, there's nothing a credit repair company can do for you that you can't do for yourself.

According to the FTC, you may find yourself in legal trouble if you lie on a credit or loan application, or obtain an Employer Identification Number, or EIN, from the IRS for that purpose. EINs are used by businesses to report their financial information; they are never a substitute for your Social Security number.

If a credit repair company advises you to apply for credit using an EIN rather than your own Social Security number, they may in fact be selling you a Social Security number stolen from a child. Following their advice could land you in prison or hit you with hefty fines. This is often an identifying mark of a credit repair scam.

When working with a credit repair company — just as when you work with a debt settlement company — you have a three-day window to cancel without any charge.

Can you repair your credit by disputing old debt?

Sometimes credit repair companies will request that you dispute all the information in your credit report — including accurate information. This is bad advice.

You should always dispute inaccuracies on your credit report with both the credit reporting companies and companies that give your information to the credit reporting companies. You should also dispute inaccurate information that arose from identity theft.

To repair your own credit record, the CFPB recommends a yearly review of your credit report which you can get for free from annualcreditreport.com.^{See note1} If you see errors, dispute them with all three credit reporting companies. As a guide, you can use the CFPB's sample letter.^{See note1}

You can't have negative but accurate information taken off your credit report unless it appears multiple times. Most negative information remains in your report for at least seven years.

Why credit counseling services are your best bet

Whereas debt settlement companies and credit repair companies are typically for-profit, credit counseling organizations are generally nonprofit. Credit counseling organizations have a mission to advise you on your money and debts. Their counselors are trained in helping people with their personal finances, and they offer educational services, such as money management workshops.

In addition to advising you on managing your money and debts, credit counselors can help you:

• Develop a budget.
• Obtain copies of your credit report and scores.
• Organize a plan to pay down your debts.

Ready to find a credit counselor? You can start by submitting your information to the National Foundation for Credit Counseling.^{See note1} Also, the U.S. Department of Justice provides a list of approved credit counseling agencies in your state.^{See note1}

Before getting started, you can ask the counselors for free information about their services.

What to do instead of debt settlement or credit repair

Unfortunately, there's no painless silver bullet to get out of debt. It's like quicksand — easy to get in but harder to get out. Instead of turning to credit repair or debt settlement services, take control over your debt with the following steps:

• Don't panic. When you realize you're in trouble, remember that you have options. Getting out of debt takes time and discipline, but you can do it.
• Talk with a nonprofit credit counselor. These financial professionals are trained to help you understand your options. They have your best interest in mind.
• Call your creditors. Explain your situation and ask if they can work with you if you're having trouble making payments. Be sure to take notes.
• Follow our "3 A's Approach" for How to get out of debt.
• Consider a balance transfer to pay off your balance faster and pay less in interest. Read more about When to consider a balance transfer.
• Consider obtaining a debt consolidation or personal loan with a lower interest rate than your debt, and use that loan to pay off your debt. But watch your spending, or you may find yourself even deeper in debt.
• Look at your spending habits. Do you have a budget? Learn how to set up a plan to take control of your finances.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.