What is Credit Repair

Credit repair is a topic that is widely misunderstood even among people in the finance and credit industries. In fact, many people even disagree on exactly what the term credit repair entails.

To help gain a better understanding of what credit repair is, it helps to take a look at the history of the credit system in the U.S. and how this system has evolved into the score driven world of credit in which we currently live.

An Overview of the Credit System

The credit system as we know it today was started when individual banks and other lenders sought to create a tool they could use to accurately predict the credit risk of individual borrowers. They began collecting information about borrowers such at their income, marital status, gender, race, religion, personal appearance, and whatever else they could think of that they felt would help in determining a person's credit worthiness. This collection of information was recorded in the first versions of what has become known as a credit report.

When a borrower applied for a loan or other type of credit account, the lender looked over the information included in the credit reports and used this information to make assumptions about the borrower's ability and likeliness to repay the debt in a timely fashion. If the borrower was perceived to be too much of a credit risk, then the lender would deny the loan. If the borrower was determined to be within an acceptable level of risk, then the lender would extend the loan with the interest rate on the loan being assigned based on that level of risk. As is the case today, the higher the credit risk, the higher the interest rate lenders would charge.

As the credit system matured and the nation's population became larger and more mobile, it was not longer practical or efficient for individual lenders to compile their own credit reports for all possible . Local credit bureaus were born from lenders' need to have more consistent and universally accessible credit information on prospective clients. Instead of compiling their own reports, lenders began providing their data about individuals to the credit bureaus. The credit bureaus would collect this information and combine it with the data sent by other creditors to create a credit report that included a more comprehensive look at an individual's credit history. Creditors could then purchase these consolidated reports for individual borrowers.

As a consequence of this more readily available and more complete credit information, the importance of an individual's credit report also increased. In an ongoing effort to maximize efficiencies, lenders began putting more and more emphasis on the information contained within these credit reports instead of spending significant amounts of time interviewing prospective borrowers and researching their financial histories.

Consolidated credit reports was a start but it was still a time consuming chore to wade through all of the information in a consumers credit reports in an effort to predict credit risk. To help further streamline the lending process, a group of statisticians at the Fair Isaac Corporation began work in the late 1950s to create a mathematical model that could be used to predict credit risk. By analyzing various elements of an individual's credit history, this model attempted to generate a single three-digit number that accurately represented a consumer's credit risk known as a FICO score.

Using this FICO or credit score, lenders could now make even faster decisions because they did not have to spend as much time looking through the individual entries in an individual's credit reports. Unlike the early days of the credit reporting system where lenders had to take into account the assorted credit accounts for a prospective borrower and draw conclusions based on this information, lenders could now make decisions based almost entirely on a person's credit score and their current earnings.

This newly realized ease of determining credit risk once again increased the importance of an individual's credit reports because lenders could approve or deny loan applications based solely on the information they contained. As a natural consequence, the importance of the credit bureaus was also amplified. To better serve clients and shareholders, and to further consolidate the consumer information they recorded, the credit bureaus experienced a period of acquisitions and mergers that resulted in the three major credit bureaus system we have today. Operating as separate for-profit entities, Experian, Equifax, and TransUnion are the three most recognizable credit bureaus in the nation and each maintains a credit file for millions of Americans.

Modern Consumer Protection Statutes

This optimizing and automating of the credit reporting system has not come without problems, however, and a number of laws have been passed to help regulate what has become an integral part of consumer finances. These laws are designed to protect individual consumers from abusive practices of lenders and the credit bureaus.

Fair Credit Reporting Act (FCRA)

The most important and well known of the consumer credit protection statutes is the Fair Credit Reporting Act (FCRA). It is the FCRA that dictates what information can be stored in a credit report, how this information can be used, and what consumers can do to ensure its accuracy.

Prior to the FCRA, the credit bureaus would collect a wide assortment of information about people such as race, religion, and even subjective information such as whether or not someone smelled of alcohol. This information could then be added to a person's credit file and stored indefinitely. Prejudices and personal bias could then become cause for a person to be denied a loan or a fair interest rate. People could also be denied credit because of transgressions that had occurred decades in the past.

In addition, consumers did not have the right to see what information was being recorded in their credit reports and they had no recourse when the credit bureaus recorded incorrect data about them. If an incorrect entry was added to a person's credit report through no fault of their own, it was possible for this incorrect listing to affect their credit standing for the rest of their life.

Today, as a result of the passage of the FCRA in 1970 and a number of subsequent amendments, consumers have much more protection and control over their credit reports. The credit bureaus are no longer allowed to collect subjective personal information and there is a maximum time limit of 7 years that most items can be reported. In addition, consumers are now entitled to receive one free copy of their credit report from each of the three major credit bureaus every year and an additional free copy of their credit report whenever their credit reports contribute to their being denied credit or employment.

Along with allowing consumers to view their credit reports, the FCRA also afforded consumers with the right to question the accuracy of any listing in their credit reports. Because of the FCRA, consumers have the right to dispute with the credit bureaus any listings in their credit reports that they feel are inaccurate, untimely, misleading, biased, incomplete, or unverifiable. The credit bureaus are then required to conduct a reasonable investigation to determine the accuracy of the disputed listing. If after 30 days the credit bureau is unable to do so, they are required to remove it from the credit report.

Fair Debt Collection Practices Act (FDCPA)

The most well known applications of the Fair Debt Collections Practices Act (FDCPA) concern the interaction between debt collectors and consumers, specifically the methods, frequency, tone, and content of communications from debt collectors to consumers. It is the FDCPA that makes it illegal for debt collectors to misrepresent their identity, use profane language, threaten physical violence, and many other abusive tactics that have been employed by collectors in the past.

As it relates to credit reports, the FDCPA also affords consumers the right to question the veracity of a debt and force the collector to prove the accuracy of the debt. This method of "debt validation" ensures that collectors cannot harass individual consumers for payments on debts which are not their responsibility and ensures that the collections activity does not remain on the consumer's credit bureau file.

Fair Credit Billing Act (FCBA)

Similar to how the FDCPA legislates the actions of debt collectors, the Fair Credit Billing Act (FCBA) legislates the actions of other creditors. As is the case with the FDCPA, the FCBA gives consumers the right to challenge the accuracy of a debt with the original creditor. Following set procedure, the creditor is required to respond within a timely fashion with documentation validating the accuracy of the debt. If they are unable to do so, any information pertaining to the debt is required to be removed from the consumer's credit reports.

Credit Repair Organizations Act (CROA)

With the passage of the FCRA, consumers had the right to dispute items in their credit reports. To help facilitate this, a new industry of credit repair professionals and companies emerged. These credit repair organizations offered to manage the dispute process for consumers in exchange for a fee.

Preying on a general lack of knowledge among consumers, a number of fraudulent "credit repair" organizations also emerged. A common tactic of these fraudulent credit repair clinics was to promise complete removal of all negative information from a person's credit reports or the creation of a completely new credit file in exchange for many hundreds or even thousands of dollars. Thousands of Americans were bilked out of millions of dollars by these credit repair clinics who typically provided little or no help to desperate consumers.

Approved in 1996, the Credit Repair Organizations Act (CROA) was enacted to legislate the credit repair industry and to protect consumers from becoming the victims of a credit repair scam. To do this, CROA made illegal many of the practices common among fraudulent credit repair clinics. Among these include collecting fees before services are rendered, making incorrect or misleading statements such as promising to remove accurate negative information, and not informing consumers of their right to order copies of their credit reports and attempt to repair their credit themselves.

Because of CROA, many fraudulent credit repair clinics have been shut down or forced to pay substantial settlements. In February 2006, a combined effort involving the FTC the USPIS and eight state law enforcement agencies coined "Project Credit Despair" identified 20 credit repair clinics that were alleged to be operating in violation of CROA. These companies were accused of promising "to remove accurate and timely information from consumers' credit reports, and typically charged hundreds of dollars in advance for the service."

The Need for Credit Repair

The current credit reporting system is still very similar to how it operated decades ago. Because of the way these dated methodologies factor into the modern credit scoring system, it is necessary for many consumers to take an active role in the management of their credit. What follows are some of the characteristics of the credit system that necessitate credit repair.

Absence of Verification

As was the case nearly a century ago, positive and negative information is added to consumer's credit files whenever it is reported to the credit bureaus by individual creditors. This information is assumed to be correct by the credit bureaus and is added to credit reports as is. There is no additional verification process that ensures the information is accurate unless the item is disputed by the consumer.

This causes problems because as has been evidenced in a recent study by the USPIRG, the information reported to the credit bureaus is often time inaccurate. According to the USPIRG study, as many as 79% of all credit report contain errors with 25% of those errors being significant enough to result in denial of credit. These errors range from incorrectly dated accounts, to duplicate listings, to severely negative items such as bankruptcies or foreclosures being added to the wrong consumer's credit reports.

No Accounting for Circumstances

Prior to the advent of the credit score, creditors were far more meticulous in their analysis of a consumer's credit report. They would look over each positive and negative listing and often times afford prospective borrowers the opportunity to explain the circumstances behind any negative information.

In today's credit score driven society, creditor's focus almost exclusively on the credit score as opposed to the information the credit reports contain. This is problematic because the credit scoring model does not take the circumstances behind a negative credit listing into account. While a 1940s lender may be sympathetic to a prospective borrower who had a few late payments on their credit reports because of a medical emergency, today's credit scoring model does not discriminate in this fashion. A negative item in a consumer's credit report is given equal weight in the credit scoring model whether the consumer was careless with their finances, a victim of identity theft, or a victim of some other event outside their control.

This is why the FCRA has been interpreted to allow not only for the disputation on patently inaccurate negative items but also items that can be classified as misleading or biased.

Methods of Credit Repair

The most common tactic for repairing credit is the credit bureau dispute as defined by the Fair Credit Reporting Act. When disputing an item with the credit bureaus, a consumer informs the credit bureau that they are disputing the accuracy of a credit listing being displayed on their credit reports and request that the credit bureau perform an investigation to determine the validity of the listing. The credit bureaus are then required to "free of charge, conduct a reasonable reinvestigation to determine whether the disputed information is inaccurate" for disputed listings that they do not deem to be "frivolous or irrelevant". If the credit bureau receives information showing that the listing is incorrect, then it must revise or remove the listing. Also, If after 30 days the credit bureau does not receive information confirming the accuracy of the listing, then the listing must be removed.

Additional methods of credit repair include direct creditor disputes and debt validation requests as made available by the FCBA and FDCPA.

These types of credit repair methods which focus solely on removing negative information from consumer credit reports have been termed "credit report repair". Along with these credit report repair methods, there are a number of other strategies for improving credit scores that can also fall under the category of credit repair. Among these include the use of authorized user accounts, management of utilization ratios, and illegal "file segregation" tactics.

Credit Repair Companies and Law Firms

As was evidenced by the number of fraudulent credit repair clinics that emerged under the pretense of helping consumers repair their credit, the credit correction rights afforded to consumers under the various consumer protection statutes had created the need for an industry of credit repair professionals who could assist consumers in taking full advantage of these rights.

Recognizing this need, a number of attorneys began considering offering credit repair services as an extension of their practices. The problem was that, while attorneys were among the most qualified professionals when it came to interpreting and applying credit law, the services of an attorney were also prohibitively expensive for most consumers. One of the first attorneys to address this challenge was John Buckley, an Orem, Utah lawyer who specialized in real estate law. Buckley sought to systematize the credit repair process for clients in order to provide an effective credit bureau disputation service at a price that was practical for the average American. After a period of experimentation and refinement of the service, Buckley's credit repair service began to see positive results. To reflect the new direction of his growing law firm, Buckley initially named the firm "The Law Offices for Consumer Affairs". Shortly afterwards, he renamed the firm "Lexington Law" in homage to the American Revolutionary War and the revolutionary work his firm was performing.

Currently under the direction of attorney John Heath, Lexington Law has grown into the largest credit correction law firm in the country. Initially only providing credit bureau disputes, Lexington Law has expanded their service offering to include creditor interventions, debt validation services, monthly credit score analysis, and more. As of 2008, Lexington Law consisted of 22 attorneys with a staff of over 400 paralegals and agents. In 2011, Lexington Law assisted clients with the removal of over 2.5 million negative items from their credit reports.

Following the lead of Lexington Law, a number of other credit repair law firms and non-law firm organizations have begun offering an assortment of credit repair services ranging from the traditional credit bureau disputes, to direct creditor interventions, to less reputable services such as providing authorized user accounts.

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