A long-running scam by illegitimate credit repair operations is throwing a wrench into the already-beleaguered credit report dispute process, making it harder for the big three credit bureaus to keep up with legitimate disputes.
Credit reporting agencies complain they are inundated with dispute letters bulk mailed by fraudulent credit repair clinics, accounting for an estimated one-third of the mail credit bureaus receive. Some credit repair companies, for a fee, sometimes add an illegal promise: to boost credit scores by erasing legitimate but negative information from credit reports.
"The longstanding scheme is to send multiple letters disputing exactly the same thing on a person's credit report, even though they know the information is accurate," says Rod Griffin, director of public education at Experian.
The goal is to flood the processing centers and to try to get a dispute to fall through the cracks. Credit reporting agencies call the practice "jamming" because they say it jams up the credit report dispute process.
"What they're hoping is the data furnisher will not respond," says Norm Magnuson of the Consumer Data Industry Association (CDIA).
It works, temporarily
The scam does get results, at least for a while. Here's why: When any consumer sends a dispute to a credit bureau, the bureau will forward it to a lender (known in credit reporting circles as a data furnisher) for verification.
Under the Fair Credit Reporting Act, a credit reporting agency has to review and respond to every dispute it receives within 30 days.
In "jamming," a repair clinic will challenge everything, including records of debts that the consumer failed to pay. If the review isn't complete because, as commonly happens, a data furnisher doesn't get back to the credit bureau in time, the agency is obligated to remove the disputed record. On Day 31, the credit report is cleansed of disputed but unverified items, and the bad debt vanishes from the consumer's report.
The removal of valid items won't be permanent, though. Generally, lenders report monthly to credit bureaus. So in a few days or weeks, when the lender reports back, the disputed, but now verified item comes right back. The record of the bad debt gets reinserted onto the credit report.
In addition to reinserting verified negative marks, credit bureaus may refuse to investigate disputes if they figure out they are frivolous. So even if a credit repair agency succeeds temporarily at striking legitimate items, "it really doesn't work," says Experian's Griffin. (See chart, "How the jamming scam works.")
A problem for consumers
The harm caused by this decades-old credit repair scam goes beyond the credit reporting agencies that have to deal with the fraudulent disputes, say experts.
"The volume and spurious nature of the disputes sent by credit repair organizations intentionally interferes with the credit bureaus' business of providing accurate reports," testified consumer protection attorney Joanne S. Faulkner of Connecticut in a 2007 statement to Congress. That, in turn, harms lenders who depend on accurate credit reports to fairly assess a consumer's credit history. "The credit repair organizations' systematic deception of the credit bureaus and of consumers undermines the banking system and harms consumers and creditors alike," said Faulkner.
Consumer advocates say the long-running scam also harms consumers who hire the fraudulent clinics because they are lured into spending large sums of money on a service that ultimately doesn't work.
"Jamming" adds to the woes of the credit reporting system. It has become a crucial part Americans' financial lives, helping determine how they access credit and at what costs. In recent years, though, the system has been criticized as error-prone in its data colelction and "broken" for how it handles consumer complaints.
A review of credit repair clinics online shows prices vary widely. Some charge monthly fees as high $99 a month or more. Others charge several hundred dollars for an initial assessment, then charge extra -- sometimes as much as $100 or more -- for each negative mark that is deleted from a report.
The problem for consumers is that they don't get the result they were hoping for.
"For the most part, people are going to credit repair agencies because they have a lot of problems and they want to be creditworthy again," says Steven Baker, director of the Federal Trade Commission's Midwest Region. However, if the debt is yours, "There's really not much you can do to get it changed," he says.
Following the law Not all credit repair companies spam credit reporting agencies with excessive and fraudulent disputes. The credit repair industry's leading trade group, the National Association of Credit Services Organization (NACSO), for example, has a "no jamming" policy, according to the group's website, and urges both member and non-member companies to refrain from sending an excessive number of legitimate disputes.
"'Jamming' by credit repair firms provides no value in resolving consumers' inaccurate reports and does not further NACSO members' goals of lawfully achieving accurate client consumer credit reports," wrote the organization in an August 2013 news alert.
Many credit repair firms instead prefer to take a more strategic approach to fixing customers' credit histories and focus on information that's truly inaccurate, says John Ulzheimer, a credit expert who used to work in the credit reporting industry. "They almost act as a communications agent for the consumer."
According to Ulzheimer, the Credit Repair Organization Act -- a 1996 federal law inspired in part by the credit repair jamming scam -- helped reshape the credit repair industry and weeded out some of the bad apples trying to take advantage of consumers desperate to fix their credit.
The act "has changed how these companies have to do business in order to remain compliant with federal law," says Ulzheimer. Before it was enacted, "It was really the Wild West," he says. "Because of that, you had kind of an industry come out of the ground without a whole lot of regulation."
The law gave additional power to the Federal Trade Commission to regulate the credit repair industry. For example, "a credit repair company can't tell you to just dispute everything on your credit report," says Ulzheimer. "That's illegal."
Credit repair companies are also barred from asking for payment before providing you with a service. In addition, they must provide you with a detailed contract that explains your consumer rights and outlines what the company will do for you, how much the service will cost and how long it will take.
Experts say there are still plenty of crooks working within the credit repair industry. However, there also are legitimate operations that don't rely on deceptive tactics to ply their trade, says Ulzheimer. "In my mind, there are two categories of credit repair companies. You have companies that follow all the rules and then you have companies that are flying in the face of the law."
Some consumer advocates remain skeptical of credit repair companies' claims. "I personally haven't seen a credit repair company that says, 'We fix mistakes,'" says the FTC's Steven Baker.
Instead, the FTC sees more advertisements for companies promising to clean up reports riddled with bad debts, says Baker.
Chris Thetford of the Better Business Bureau says that many of the complaints it receives are indeed for clinics that promise more than they can deliver. According to a 2012 report by the Better Business Bureau's St. Louis chapter, the number of credit repair-related complaints the bureau receives has shot up in recent years.
"It's a question of expectations," says Thetford. "Consumers might think, based upon the marketing or the advertising that they've seen or received, that credit repair companies are able to do more than perhaps credit repair companies could do," he says.
Deatra Riley, vice president of community outreach at Credability, says credit repair companies do nothing consumers can't do themselves. "You can do it on your own," says Riley.
The credit reporting industry has already taken steps to deal internally with the large volume of disputes, says the CDIA's Magnuson. So even though the jamming scam may gum up the process, the credit bureaus are still able to respond to the disputes they receive within 30 days -- and sometimes even faster. "They're doing pretty well," he says, estimating that 70% of all disputes are resolved within 14 days.
Nevertheless, the Federal Trade Commission continues to crack down on fraudulent clinics -- when it can catch them. "We're spread too thin," says Baker. "We're a small agency and we deal with a massive problem of consumer protection." The FTC has fined or shut down a number of clinics. "But we can't get at them all," he says.