A Little Background on Credit Repair Companies
Millions of consumers are denied credit based on false information stored in their credit reports. The issue is widespread – as many as one in five Americans have false data on their reports. This essentially translates to either you or someone in close proximity to you has already been affected by this.
Getting the credit bureaus to remove false information is time-consuming and requires a certain level of experience that most people lack. So, many turn to credit repair companies to do the work for them. Unfortunately, doing so isn’t always a wise choice.
There are many reputable companies that provide good service at a reasonable price; however, many credit repair organizations break the rules. Seems rather ineffective considering you hired them to make your life easier, right?
Credit repair is a highly regulated activity – companies are required to provide accurate information about what they can achieve and they are not allowed to charge customers in advance. They can only receive payment after they have provided a service.
The Crackdown
Organizations such as the Consumer Financial Protection Bureau (CFPB) are very active in suing credit repair firms that break the rules. Rest assured, the FTC regularly prosecutes the worst offenders.
Recently, the number of cases against credit repair organizations has dramatically increased – and most of these cases are the result of illegal upfront fees. Given that up-front payments are illegal, why have so many organizations taken the risk?
The Freezing Point
Well, to understand the issue, we have to take a look at the way these companies get paid.
Most of these companies rely on electronic payments, either via the web or over the phone. To process these payments, they require the services of a bank authorized to deal with the credit associations (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
* Elavon
* Deutsche Bank AG
Other banks are likely to follow suit over the next few months.
Credit repair companies are considered high risk for a number of reasons. First, there is the general fallout from the misleading claims made by some of the firms. 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. All of which reflect badly on the banks and their agents. As if you needed to add insult to injury!
Another issue is the high charge-off rate in the credit repair industry. A charge-off occurs when a bank is unable to collect 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-off rate.
The combination of these factors makes credit repair agencies a bad risk for banks. As a result, several banks have closed their merchant accounts without notice. This also affects accounts opened through Independent Sales Organizations (ISOs), which provide merchant account services through the banks. ISOs essentially work as agents for the banks, selling their merchant services to new customers.
The Overall Effect on The Market
Each of these banks sponsor a large number of ISOs and MSPs (Member Service Providers – essentially the same as ISOs). Consequently, the impact on the credit repair industry has been catastrophic.
Having one’s account frozen is a big deal – it means you can no longer take electronic payments, and your existing balance is held in escrow pending investigation. The investigation can take up to 270 days, which means the company’s cash flow is effectively dead or frozen.
Not to mention, it’s virtually impossible for a company to open a new account once the old one has been frozen. All companies depend on cash flow to keep their doors open and their staff paid. Very few credit repair firms are in a position to survive for 270 days without funds. Out of desperation, some firms have started (illegally) charging customers upfront. As they no longer have a merchant account, they rely on third party payment gateways, such as PayPal. Of course, this is an extremely risky move and will no doubt lead to more lawsuits and prosecutions.
Looking forward, we can expect to see most credit repair agencies close their doors, as the cost of staying in business proves too high. The few who can weather the storm will emerge as the 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 casualties. At the same time, credit repair companies in good standing are also reeling 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 a better service.
On the other hand, it may be consumers who ultimately pay the greatest price – a lack of competition will probably lead to higher prices across the industry and less comprehensive services may become the norm.
Credit repair services are valuable to customers who have been unfairly labeled as a credit risk. Today, the best course of action is to choose your credit repair organization carefully. The safest choice is a reputable company with a proven track record, without outrageous or illegal fees, and the resources required to stay in business. At the present time, consumers would be wise to steer clear of smaller firms who may not survive in the current climate.