By John Ulzheimer and Chad Kusner
Regardless of what you may have read or heard about the process called “credit repair,” it’s legal and consumers do seek the help of credit repair organizations with the goal of correcting and/or improving their credit reports and credit scores. The industry has a checkered past and room to improve their reputation, but legally compliant credit repair companies do exist and do help consumers correct or remove information from their credit reports.
And while the Federal statute called the Credit Repair Organizations Act (CROA) sets tough compliance requirements on the industry, credit repair companies can and do operate fearlessly as long as they’re following the rules. And by doing so they, in turn, hold banks, debt collectors and the credit reporting agencies accountable to consumer protection laws.
One of the easiest ways to identify a company that is violating the CROA, and thus should be avoided, is to get an understanding of how they plan on billing you for their services. The CROA prohibits billing in advance of services being rendered. That means if you’re being asked to pre-pay for their services, the credit repair company is breaking the law.
Compliant credit repair firms charge for their services typically in one of two ways. They either charge for a monthly suite of services only after they have been provided, or in a pay-for-performance structure. With the latter, the client only pays if that company is successful deleting or correcting the disputed credit report data. Each billing format has its pros and cons, and selecting one over the other may be more difficult than imagined. The following will provide insight into the two structures, weighing the pros and cons.
Why Payment Format Is Important
The government entity that is tasked with enforcing the CROA is the Federal Trade Commission (FTC), but the Consumer Financial Protection Bureau (CFPB) can also nail a non-compliant credit repair company. Based on their prior actions, it appears the FTC’s interpretation of compliance with the CROA’s advanced fee payment is as such:
1. The completed services have been provided as outlined within the agreement signed by the consumer, thus payment demand is proper and legal.
2. There has been meaningful improvement to the consumer’s credit report and or credit score, thus payment demand is proper and legal.
3. All the work that will ever be done for the consumer by the credit repair organization has been fully completed, thus payment demand is proper and legal.
If you review the CROA, you’ll notice that the advanced fee language is written somewhat ambiguously, some believe by design, so that bad actors have nowhere to hide from enforcement actions because it could be interpreted very liberally. Therefore, credit repair companies have had to carefully structure their payment models to be uber-compliant.
The bottom line is simple: Avoid any credit repair company that requires upfront payment of any amount for any reason.
Subscription Based Credit Repair Services
Many credit repair companies use a subscription billing model and charge their customers monthly for services rendered during the previous month, or in arrears. Meaning, they bill their clients every 30 days for the previous month’s work.
Typical credit repair subscription rates range from $59 to $129 per month. To comply with the advance fee payment provision of the CROA, the credit repair company must first disclose to their customer in writing what they’re receiving for the monthly payment and, second, be able to demonstrate the services were fully provided during that previous month.
Often companies with this billing structure may charge a higher initial amount called an “initial audit” or “discovery” fee. If the agreements clearly outline this front-loaded variance in billing, it’s typically not considered to be a red flag among credit repair company owners. Typically, there is more work to do – and therefore more expense – on the front end of a credit repair engagement, including customer acquisition and enrollment.
And while this can create sticker shock for a new customer, the contrary (very low fees) should be even more concerning, argue many credit repair company owners. Lower fees and, thus, lower barriers to entry are enticing. Paying $99 instead of $299 can seem like a sound financial decision, but not if you’re getting a substandard service. In that case, even the $99 was poorly spent.
Companies that charge extremely low initial fees are incentivized to keep their clients in their subscriptions as long as possible because, you guessed it, every month there’s a new invoice to be paid. This not only prolongs the time it takes to complete the credit repair process, but it almost guarantees a higher cost to the consumer over time.
The time needed to complete as full a credit report rehabilitation as possible should take between three and seven months. Anything longer than that may require attorney intervention or the filing a complaint with the CFPB.
Pay for Performance, a.k.a. Pay for Delete or PPD
Pay for Performance, also called Pay for Delete or PPD, is a newer pricing model in the credit repair industry. The process entails charging clients only after the credit repair company is successful removing or correcting the information on a client’s credit reports.
At first glance this seems to be a more customer-friendly payment structure, and in some cases that’s true, especially if the likelihood the item will be removed from the customer’s credit report is low.
What is often overlooked, however, is the potential longer-term financial commitment PPD can be. Because the credit repair firm is only charging for their successes, they can be tempted to offset their costs when they’re not successful.
The way this is done is by charging for every item that is corrected and/or deleted from a credit report on each of the three credit bureau reports. For example, say you have a collection on your credit reports, all three of them. If the credit repair company is successful in deleting the collection, they may charge as much as $50 per credit bureau, or up to $150 total. That’s $150 for one collection item that was removed from all three credit reports.
Now consider when the company is successful getting 10 unique items removed from each credit report — not an unrealistic scenario, especially for consumers who have very poor credit. That could cost the consumer $1,500 or more.
When you compare PPD to a subscription-based pricing model, the same results may cost the consumer many times as much. The credit repair company is still rock solid in its compliance with the CROA’s restriction on advance billing, but was its pricing structure the most competitive for the customer?
Many credit repair company owners offer both pricing structures and allow their customers to choose which one they like better. But these same owners warn that consumers should not choose a credit repair company simply based on costs. If budget is a concern, you may want to consider working to clean your credit reports on your own, which is completely free except for the investment of time.
If an offer sounds too good to be true, it likely is just that. There is no silver bullet that can clean up your credit reports. It takes time, effort and persistence. Run like the wind from companies that use platitudes like “Credit Problems, No Problem,” or “We erase bad credit, guaranteed,” or “Raise your credit score 200 points in 30 days.”
If you do choose to get professional help, review the details of the services. Weigh the pros and cons of both payment models keeping your budget in mind and, equally important, just how deep your credit challenges run.
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John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.
Chad Kusner is a 15-year veteran of the consumer credit industry. He is the owner and CEO of Credit Repair Resources, a CROA-compliant credit repair organization based in Cleveland. He is FICO Pro Certified and a director of the credit repair trade association, NACSO. Kusner has been approved by the Ohio Supreme Court as a Continuing Legal Educator.