A little background on credit repair companies
Millions of consumers are denied credit based on false information stored in their credit reports. The problem is widespread – up to one in five Americans have false information about their reports. This essentially translates to either you or anyone near you has already been affected by this.
It is time-consuming to get the credit bureaus to remove false information and require some level of experience that most people lack. So many turn to credit repair companies to do the work for them. Unfortunately, making it is not always a wise choice.
There are many reputable companies that provide good service at a reasonable price; however, many credit repair organizations are breaking the rules. Seems to be ineffective considering you hired them to make your life easier, right?
Credit repair is a very regulated activity – companies are required to provide accurate information on what they can achieve and they are not allowed to charge customers in advance. They can only receive payment once they have provided a service.
Organizations such as the Consumer Financial Protection Bureau (CFPB) are very active in suing credit repair companies that are breaking the rules. Make sure the FTC regularly prosecutes the worst offenders.
Recently, the number of cases against credit repair organizations has increased dramatically – and most of these cases are the result of illegal upfront fees. Given that prepayments are illegal, why have so many organizations taken the risk?
The freezing point
To understand the problem, we need to look at how these companies get paid.
Most of these companies rely on electronic payments, either over the internet or over the phone. To process these payments, they require the services of a bank authorized to trade with credit unions (Visa, MasterCard and / or American Express). The credit repair company uses their approved “merchant accounts” to process the payments.
Recently, a number of banks and their agents have frozen “high-risk” accounts – including credit repair organizations.
These banks include:
* BMO Harris Bank
* Chesapeake Bank
* Merrick Bank
* Wells Fargo Bank
* Esquire Bank
* Deutsche Bank AG
Other banks are likely to follow in the next few months.
Credit repair companies are considered a high risk for several reasons. First, there is the general waiver of the misleading claims by some of the companies. Although some companies are completely honest with their customers, the entire industry is damaged by the few who mislead them.
These false claims lead to customer complaints, chargebacks and refund requests. Everyone reflects poorly on the banks and their agents. As if you needed to add insult to injury!
Another problem is the high tax rate in the credit repair industry. A charge occurs when a bank is unable to charge the fee from a customer. While credit repair companies tend to attract customers with a bad history of credit management; Subsequently, the industry has a much higher than usual charge rate.
The combination of these factors makes credit workshops a bad risk for banks. As a result, several banks have closed their trading accounts without notice. This also affects accounts opened through Independent Sales Organizations (ISOs) which provide trading account services through the banks. ISOs essentially act as agents for the banks and sell their business services to new customers.
The overall effect on the market
Each of these banks sponsors a large number of ISOs and MSPs (member providers – basically the same as ISOs). Consequently, the impact on the credit repair industry has been catastrophic.
Having a frozen account is a big deal – it means you can no longer take electronic payments and your current balance is kept in escrow pending an inquiry. The investigation can take up to 270 days, which means the company’s cash flow is actually dead or frozen.
Not to mention, it is almost impossible for a company to open a new account once the old one is frozen. All businesses rely on cash flow to keep their doors open and their staff paid. Very few credit companies are able to survive for 270 days without funds. Out of desperation, some companies have started (illegally) charging customers in advance. Since they no longer have a trading account, they rely on third-party payment portals, e.g. PayPal. Of course, this is an extremely risky step and will undoubtedly lead to more lawsuits and prosecutions.
Looking ahead, we can expect to see most credit repair companies closing their doors as the cost of living in business proves too high. The few who can reject the storm will emerge as market leaders.
On the one hand, this is a good thing for consumers – companies with poor customer service and misleading information will be among the first injuries. At the same time credit repair companies in good condition is also rolled from the blow, and some will no doubt falter and fail. Competition is healthy in any market. It keeps prices low and forces companies to provide better service.
On the other hand, it may be consumers who ultimately pay the biggest price – a lack of competition is likely to lead to higher prices across the industry and less comprehensive services can become the norm.
Credit repair services are valuable to customers who are unreasonably labeled as a credit risk. Today, the best choice of action is to choose your credit repair organization carefully. The safest choice is a reputable company with a proven track record with no scandalous or illegal fees and the resources required to stay in business. At this point, consumers would be wise to avoid smaller businesses that may not survive in the current climate.