If a low credit score is interfering with your plans to buy a house, start a business or get a better rate on your insurance, you may be tempted by offers and techniques that promise to repair your credit quickly and dramatically. Most of these are illegal scams at worst and a waste of time at best. Here are five extreme credit repair techniques we do not recommend. (For related reading, take a look at Can You Hit A Perfect Credit Score?)
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1. Hiring a Credit Restoration Service
There is no shortage of companies promising to repair your credit or clean up your credit report. If you're considering this option, stop.
Ken Lin, CEO of Credit Karma, says, "Credit repair scams operate on loaded taglines designed to lure desperate, poor credit consumers." Likewise, the Federal Trade Commission (FTC) says that many of these companies are really offering to help you declare bankruptcy, though their advertisements often don't state it. The FTC also says that organizations offering to repair your credit simply can't accomplish this and that a credit repair company is selling you nothing more than a scam if it does any of the following:
- Wants you to pay for credit repair services before any services are provided
- Does not tell you your legal rights and what you can do yourself - for free
- Recommends that you not contact a credit reporting company directly
"It doesn't matter how much money you throw at credit bureaus to clean up your credit report," Lin says. "Credit bureaus don't remove any negative marks unless they are legitimate inaccuracies or mistakes. A better strategy is to check your credit report yourself every three to four months to keep an eye on any real errors dragging your score down."
In addition, the Fair Isaac Corporation says, "raising your FICO score is a bit like getting in shape: It takes time and there is no quick fix. In fact, quick-fix efforts can backfire. The best advice is to manage credit responsibly over time."
2. Practicing File Segregation
File segregation entails creating a new credit file for yourself by applying for an employer identification number (EIN) from the IRS, then using that number instead of your Social Security number to apply for credit. Legitimate businesses can and do use their EINs when applying for business credit. But if you do it as an individual for the sole purpose of hiding your true credit history, it's fraud. Some credit repair companies will also use file segregation as one of their tactics.
Whether you do it yourself or a credit repair company does it on your behalf, file segregation is illegal. According to the FTC, "You could be charged and prosecuted for mail or wire fraud if you use the mail or telephone to apply for credit and provide false information. It's a federal crime to make false statements on a loan or credit application, to misrepresent your Social Security number, and to obtain an Employer Identification Number from the Internal Revenue Service under false pretenses."
3. Consolidating Your Accounts
The credit bureaus weigh the amount of credit you've used against the total credit available to you (called credit utilization) in calculating your credit score. They also look at the average length of time your credit accounts have been open.
Because of this, consolidating your accounts can have a negative impact on your score in two ways. One, it can lower the total credit you have available, and two, it can decrease the average length of time each of your accounts has been open. And if you're consolidating everything into a new account, this will also hurt you because 10% of your score is based on how much new credit you have applied for.
Closing all your accounts lowers your score for the same reasons. Also, FICO says that "closing an account doesn't make it go away. A closed account will still show up on your credit report, and its history will be considered by your FICO score." Negative items will remain on your credit report for seven years whether those accounts are still open or not.
However, if consolidating your accounts to a lower-interest-rate credit card and closing old accounts that charge annual fees will make it easier for you to pay down your debts, consolidating your accounts can have a positive, long-term effect on your credit that should outweigh any negative short-term effects. This assumes, of course, that you can get approved for a new account with a better interest rate, which may not be the case if your credit is poor.
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4. Disputing Every Negative Item on Your Report
Some credit repair schemes say that you can temporarily raise your credit score by disputing every negative item on your credit report, even if you know it to be accurate. They claim that the credit bureaus must drop the disputed information from your report for 30 days while they investigate the claim.
Simply put, this is not true. The negative items will remain on your report while they are being investigated, and they will stay there when your creditors confirm their accuracy.
5. Avoiding Credit Forever
No one says you must use credit. You can simply avoid doing anything that requires it. You don't have to take out a mortgage or borrow money to buy a car. Buying plane tickets, renting cars, booking hotel rooms and shopping online are difficult, but possible, to accomplish without a credit card. And if you can find a landlord who won't check your credit or you can convince one to overlook your bad credit (perhaps with a fat security deposit), you can forget about your credit score forever. Just don't forget to pay off your existing debts - they won't forget about you. (For more on whether you can get by without credit, see Can You Live A Debt-Free Life?)
The Bottom Line
Be extremely cautious with any method that promises to help you quickly and easily repair your credit, because ignorance won't protect you if you run afoul of the law in the process. The FTC says, "If you follow illegal advice and commit fraud, you may be subject to prosecution." The best way to repair your credit is to avoid extreme measures and stick to plain vanilla solutions.