What Is The Credit Repair Organization Act And How Does It Affect You?

Compassionate Eye Foundation/David Oxberry/Getty Images

Credit repair companies may offer to help you improve your credit score by disputing the inaccurate or outdated information on your credit report. Any company offering credit repair services must follow the rules set out in the Credit Repair Organizations Act (CROA).

The CROA regulates what credit repair companies can do when helping people improve their credit. Understanding how the CROA works can help you make informed decisions about credit repair services and avoid getting scammed.

The Credit Repair Organization Act 

The CROA is a federal law that regulates credit repair companies and gives consumers certain rights. Congress enacted the CROA in 1996 in response to concerns that dishonest credit repair companies were taking advantage of vulnerable consumers who had experienced credit problems. 

The goal of the CROA is to protect consumers from illegitimate credit repair companies that rely on unfair or misleading advertising and business practices. It ensures that consumers receive enough information about a credit repair company’s services to make an informed purchasing decision. 

Consumer protections in the CROA 

The CROA works to protect consumers from dishonest credit repair organizations. The law sets out clear regulations for companies offering paid credit repair services. It prohibits certain unfair or misleading practices and requires companies to protect consumers’ rights. 

To comply with the CROA, credit repair agencies must:

• Accurately represent their services: Credit repair companies must be clear and honest in their marketing. Untrue or misleading claims, such as promising a quick fix or guaranteeing a certain credit score, are not allowed.
• Enter into a written contract: By law, the contract must include a detailed description of the credit repair services. That includes how long the services will take, the total amount of payments and the terms of payment. 
• Give new customers the option to cancel: Under the CROA, customers have a three-day cooling-off period after signing the contract. Customers can cancel the contract without penalty at any time in this window. 
• Provide a written disclosure statement: Credit repair companies are required to give customers a standardized disclosure that explains their rights under state and federal law. That includes the right to contact credit bureaus directly.
• Only bill customers for completed services: The CROA bans upfront payments. Credit repair companies must fully perform a service before requesting payment.

Legal and illegal credit repair practices under the CROA 

Companies that advertise credit repair services use a variety of tactics to try to improve customers’ credit scores. Understanding the difference between legal and illegal tactics can help you protect yourself from scams when looking at credit repair services. 

Legal credit repair practices 

Reputable credit repair companies have many ethical and legal methods for cleaning up customers’ credit reports. What these methods have in common is that they do not attempt to hide accurate negative information or mislead the credit bureaus. 

Some examples of legal credit repair practices under the CROA include:

• Disputing credit report errors: The Fair Credit Reporting Act allows consumers to dispute inaccurate or incomplete information in their credit reports. It’s legal for credit repair companies to offer help with this process, so long as they stay within CROA guidelines and are honest about their services.
• Writing debt validation letters: A debt validation letter requests proof that a debt is legitimate. Credit bureaus must correct or delete unverifiable information, so credit repair companies may use this tactic to remove zombie debt from a customer’s report.
• Writing goodwill letters to creditors: A goodwill letter is a formal request for a creditor to forgive a late payment or other negative item. This tactic is legal, but creditors are not obligated to honor the request. 

Illegal credit repair practices 

The CROA bans credit repair companies from using any practices involving fraud or deception. Companies aren’t allowed to use tactics that mislead the credit bureaus or lenders or that try to hide accurate negative information on a customer’s credit report. 

Some examples of credit repair practices that violate the CROA include:

• Creating a new credit identity: Some illegitimate companies tell consumers they can start fresh by building credit with a credit privacy number or alternate Social Security number. Using false information to apply for credit is considered fraud.
• Disputing everything in your credit report: While it’s legal to dispute incorrect information, it’s illegal to mislead the credit bureaus by disputing negative but true items on a credit report. 
• Filing false identity theft reports: Credit bureaus are required to remove fraudulent information resulting from identity theft. Filing false identity theft reports in an attempt to get accurate information removed is an illegal practice. 

Consequences of violating the CROA 

For credit repair companies, the penalties for failing to comply with the CROA can be significant. Companies that break the law may face lawsuits from customers, Federal Trade Commission (FTC) enforcement and even criminal charges. 

Lawsuits from consumers 

By law, consumers have the right to sue a dishonest credit repair company that violates the CROA. They can sue for their actual damages, meaning the amount they paid the credit repair company or the amount of their damages — whichever is more. Courts may also award punitive damages to punish and make an example of the company. 

Lawsuits may take the form of a class action. In this type of lawsuit, many customers who were harmed by a credit repair company that violated the CROA band together to sue the company.

FTC enforcement actions 

The FTC is a U.S. government agency that enforces consumer protection laws. It has the power to take various court and administrative actions.

The FTC may first send a letter to warn the credit repair company that it is violating the CROA. According to the FTC, warning letters are very effective, and most companies quickly take steps to follow the law. 

The FTC may file a complaint in federal court for companies that do not comply. Past court proceedings have resulted in significant consequences for companies, from being required to pay millions of dollars in restitution to being permanently banned from offering credit repair services. 

Potential criminal charges

Credit repair practices that violate the CROA may also be offenses under criminal law. People who operate illegitimate credit repair companies may face criminal charges for crimes like identity theft or wire fraud. 

The potential penalties for committing crimes vary but may be significant. Once proven guilty, credit repair scammers could face fines or even prison time for their actions. 

How to report violations 

Reporting companies that violate the CROA helps protect other consumers from predatory or dishonest credit repair practices. You can report violations by contacting any of the following agencies:

• Consumer Financial Protection Bureau (CFPB): Visit the CFPB website or call (855) 411-2372 to submit a complaint. The CFPB shares complaint data with state and federal agencies and may file lawsuits against companies. 
• Federal Trade Commission: Visit the FTC’s fraud reporting portal or call the Consumer Response Center at 1-877-FTC-HELP (382-4357) to report scams, fraud and other bad business practices. The FTC analyzes complaint data to identify companies that may be violating the CROA so it can take appropriate action.
• Your state’s attorney general (AG): Find your AG and their office’s contact information on the National Association of Attorneys General website. Attorneys general have the power to take action against predatory companies. 

The bottom line

The Credit Repair Organizations Act outlines clear guidelines for how credit repair companies can operate. It aims to protect consumers by banning misleading and deceptive business practices and guaranteeing certain rights and protections for consumers. 

If you come across a credit repair company that seems to be violating the CROA, file a report to protect other people and choose a more reputable credit repair company.

Frequently asked questions

• What are the warning signs of credit repair scams?
  

  Credit repair companies that don’t follow the CROA may be fraudulent. Use caution if a company demands upfront payment, refuses to give you a contract or doesn’t explain your rights. Watch out for other signs of a scam, like high-pressure sales tactics and offers that seem too good to be true.

• Can I fix my credit myself?
  

  Do-it-yourself credit repair is possible. You have the right to contact the credit bureaus on your own, and there’s no fee for filing a dispute. That said, the process can be complicated and time-consuming, so some consumers find it helpful to have a credit repair company handle the process.

• How can I find a reputable credit repair company?
  

  Many legitimate credit repair companies follow the CROA. When comparing credit repair offers, pay close attention to each company’s fee structure and credit repair services to ensure they’re complying with the law. To find out if other people had issues with a specific company, you can read online reviews or check the CFPB’s complaints database.