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?)


IN PICTURES: 7 Tips To Bounce Back From A Credit Score Disaster

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.


IN PICTURES: 5 Keys To Unlocking A Better Credit Score

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.

Related Articles
  1. Credit & Loans

    Can Corporate Credit Cards Affect Your Credit?

    Corporate cards have a hidden downside. If the company fails to pay its bills, you could be liable for the amount and end up with a damaged credit rating.
  2. Credit & Loans

    Millennials Guide: Picking the Best Rewards Cards

    There are perks a-plenty on offer, but you have to find the right plastic for your lifestyle.
  3. Credit & Loans

    Your Credit Score: More Important Than You Know

    Credit scores affect key aspects of your personal and professional life. Knowing your score and managing your credit input can make a big difference.
  4. Credit & Loans

    Joint Credit Cards: The Pros and Cons

    A joint credit card may sound like an easy way to split the bills, but make sure you know what you’re getting into first.
  5. Credit & Loans

    Fixing Your Credit Score: A Do It Yourself Guide

    Following these five steps can go a long way toward repairing a low score.
  6. Credit & Loans

    Co-signing a Loan? Make Sure You Know The Risks

    Contractually, co-signers are just as responsible for the loan as the person actually borrowing the money. Be careful not to put yourself at risk.
  7. Investing Basics

    Should You Increase Your Credit Card Limit?

    What if you took out a new credit card and the issuing company started you off with a fairly low credit limit that hasn't been raised after the first year. Should you ask for an increase? The ...
  8. Credit & Loans

    Using Your Credit Card To Rebuild Credit

    Responsibly using credit cards is one of the best ways to rebuild a poor credit rating.
  9. Credit & Loans

    How To Boost Your Credit Score To Save Thousands

    One of the first steps you should follow before buying a home is to boost your credit score. And how do you do that? Here, we tell you how.
  10. Credit & Loans

    5 Ways to Up Your Chance of Getting a Mortgage

    Tips and ways to improve your chances of getting a mortgage.
RELATED TERMS
  1. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  2. Jamming

    A scam perpetrated by bogus credit repair firms that involves ...
  3. Trade Line

    Credit account records that are provided to credit reporting ...
  4. Furnisher

    A company that provides information about a consumer, including ...
  5. Semi-Secured Credit Card

    A type of credit card offered to individuals who carry a higher ...
  6. Mixed File

    A credit bureau record that contains more than one consumer’s ...
RELATED FAQS
  1. Why would someone change their Social Security number?

    In general, the Social Security Administration, or SSA, does not encourage citizens to change their Social Security numbers, ... Read Full Answer >>
  2. What types of liens are seen as good and which are bad for my credit?

    Creditors that allow purchases to be made through financing often require property to be pledged against a credit account; ... Read Full Answer >>
  3. What are the typical requirements to qualify for closed end credit?

    Typical requirements for a consumer to qualify for closed-end credit include satisfactory income level and credit history, ... Read Full Answer >>
  4. What is the best way to start to rebuild your credit after a bankruptcy?

    Bankruptcies can be devastating to your credit score. Even worse, a bankruptcy will be listed on your credit report for between ... Read Full Answer >>
  5. What are the differences between delinquency and default?

    Delinquency and default are loan terms that describe failure to make a required payment. A loan in delinquency occurs the ... Read Full Answer >>
  6. What are the differences between Chapter 11 and Chapter 13 bankruptcy?

    There are a number of differences between Chapter 11 and Chapter 13 bankruptcy, including eligibility, cost and amount of ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!