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BBB Study: Consumers Paying Scammers Thousands For Services They Can Do Themselves at No Cost

4/10/2012

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credit repair study coverSt. Louis, Mo., April 10, 2012 – Beleaguered consumers deep in debt are paying thousands of dollars to scammers to modify their credit report, a process known as credit repair, when they can do the same thing at little or no cost themselves, a St. Louis Better Business Bureau study reveals.

The study, released today, is titled “Are They Creditable? A Study of the Credit Repair and Debt Settlement Industries, Complaints, Laws & Enforcement.”

The study notes that credit repair involves an offer to erase negative information from a consumer’s credit report, while debt settlement is an effort to reduce a consumer’s debts or monthly payments through negotiations with the creditors.

“The credit repair industry has boomed alarmingly in the past few years,” the study noted, pointing to the fact that complaints to BBBs nationally regarding credit repair have risen from 133 in 2006 to 711 in 2011.

“The BBB urges consumers who are having problems with their credit score not to make matters worse by paying scammers to do what they can do by themselves,” said Michelle L. Corey, president and CEO of the BBB in St. Louis.

“Authorities have been active in pursuing law violators,” the study concludes.  “But they won’t keep up with the tide until consumers themselves are much more cautious in vetting companies with which they do business.”

According to the study, the credit repair industry lures customers with attractive ads on the Internet or elsewhere that proclaim, for example, “Fast Credit Repair - $29 – Raise Credit Score up to 130 pts” or “Get Approved for Things You Want.  100% guaranteed, Get Started Today.”

An examination of complaints filed with the St. Louis BBB showed that 85 percent of complainants said they received no services from the credit repair companies despite paying an average of $816 each.  And most received no refunds.

Even trade associations acknowledge the disrepute in which the credit repair industry is held, according to the study, citing one which says it “was born of the urgent need in the industry for a regulating body that would serve to separate member credit repair companies from the scammers and fly-by-night businesses who masquerade as professionals.”

Credit repair firms flourish in spite of the Credit Repair Organizations Act enacted by Congress in 1996 which prohibits companies from charging advance fees before promised results are achieved.  However, 97% of BBB complainants said they paid the company before any services were provided, the study notes.

The study also was critical of some in the debt settlement industry for not providing promised services and refusing to provide refunds.
Complaints filed with the St. Louis BBB show that complainants paid an average of $2,000 for debt settlement services while averaging only $67 in refunds.  Half of the complainants said no services were provided by the companies, the study noted.

Along with the credit repair industry, the debt settlement industry also has increased sharply, perhaps due to the weak economy, according to the study.  In 2006 there were 86 complaints regarding debt settlement companies filed with BBBs nationally.  By 2011, that number soared to 5,385.

“Consumers using debt settlement companies usually are required to pay a monthly fee which the company is supposed to use to pay down the consumer’s debts after negotiating lower outstanding balances with the creditors,” the study stated.  “But the non-refundable fees often outweigh the reduction in debt.”

The study quoted one consumer who said that after paying $400 per month for four months with no indication of action on the part of the company, he was told that the company said “they couldn’t negotiate any debts with those companies until those balances go into collections.”

In October 2010, the Federal Trade Commission (FTC) adopted a new telemarketing rule regarding sales of debt settlement services over the telephone.  A major change in the rule is that in addition to applying to the outbound calls of telemarketers, it also applies to calls made to the company by consumers responding to advertising.

It also prohibits companies from collecting advance fees until certain conditions are met.

The study quoted FTC Chairman Jon Leibowitz in announcing the new rule, “If you charge consumers before actually helping them, you will find the FTC and state enforcers knocking at your door to enforce the Rule.”

The study makes the following recommendations:

  • That consumers follow the FTC advice and not hire credit repair companies.  Only outdated or inaccurate information can be removed from a credit report.
  • That consumers consider a trustworthy not-for-profit organization to resolve their debt and credit problems.
  • That consumers scrutinize a debt settlement contract and thoroughly check out a company with which he or she is considering doing business with the BBB, FTC or attorney general’s office.
  • That federal and state authorities increase their efforts in rooting out the unscrupulous operators in both the credit repair and debt settlement industries.
  • That consumer-oriented agencies increase their efforts to educate consumers of the pitfalls in seeking help with their debt or credit.  

Contacts: Michelle Corey, President & CEO, 314-584-6800, mcorey@stlouisbbb.org, or Chris Thetford, Vice President-Communications, 314-584-6743 or 314-681-4719 (cell), communications@stlouisbbb.org

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