If you have bad credit, you may consider using a credit repair service to improve your credit. The truth is, a lot of these companies use dishonest and illegal methods to improve their customers' credit. Beyond that, many credit repair services are nothing more than scams to trick consumers out of their hard-earned money.
What Is the Credit Repair Organizations Act?
The Credit Repair Organization Act is a federal law put in place to protect consumers from dishonest credit repair companies. The law is intended to make sure that consumers who decide to use credit repair services are aware of their rights and are able to make an informed decision about choosing to pay a credit repair company.
A credit repair organization is any person or business who takes money in exchange for improving your credit but doesn't include banks, non-profit agencies, and credit card issuers.
Restrictions on Credit Repair Organizations
Here are a few things credit repair organizations cannot legally do under the CROA:
- Lie or advise you to lie about your credit history to your current or future creditors
- Alter your identity, e.g. get a new EIN (Employer Identification Number) or a new identity, to try to get a new credit history
- Misrepresent the services they provide to you
- Ask you to pay for services before they have been provided
The law requires the organization to provide you with a disclosure called “Consumer Credit File Rights Under State and Federal Law” that lets you know your right to obtain a credit report and dispute inaccurate information on your own. You also have the right to sue an organization for violating the CROA.
Credit Repair Contract Requirements
Before the credit repair company can perform any services for you, you must be given a contract, you must sign the contract, and the 3-business day cancellation period must expire. The contract should include the following:
- Payment amount required
- A description of the services that will be performed to repair your credit
- An estimate of the time it will take to complete the services (or a date by which the services will be completed)
- A visible statement letting you know you can cancel the contract within 3 business days
You have the right to cancel a signed contract within 3 business days. The organization cannot charge you a fee for this cancellation as long as it’s made within the specified time frame. Your contract should include a Notice of Cancellation form that you can fill out and return to cancel the contract.
Waiving Your Rights
The credit repair organization can’t ask you to sign any kind of form waiving your rights under the CROA. Any waiver you sign is considered void and cannot be enforced by federal or state governments.
Organizations that violate the law can be sued for actual damages, punitive damages, and attorney’s fees. You can report violations to the Consumer Financial Protection Bureau, your state attorney general, and file suit in your state.
You have five years from the date the violation occurred (or the date you learned of the violation) to take action against the organization.