Credit fraud can raise interest rates, increase financial service fees, and even put our homes at risk. Indeed, it can take a fraudulent actor only minutes to destroy a solid credit record that may have taken an honest consumer years to build.
Unfortunately, credit fraud can be difficult to detect. Transactions can be complicated and essential information may be hidden or undisclosed. In addition, credit fraud appears in many forms: guaranteed credit repair flim-flams, advance fee loan scams, abusive lending practices, and hijacked credit identities to name a few. In any form, it is hazardous to one’s financial health and well-being.
The good news is that consumers can empower themselves by learning to recognize credit scams and abuses and knowing how to respond. The most important tool is information. That’s why the theme of this National Consumer Protection Week is Know the Rules, Use the Tools.
This special issue alerts you to some common scams, gives consumer protection tips, outlines federal laws, and lists resources for additional help. Use this information yourself and share it with others. Every educated consumer helps us fight fraud and abuse in the marketplace.
Credit Repair: Self-Help May Be Best
"The ads say they can remove bankruptcies, judgments, liens, and bad loans and credit accounts from my credit report. Should I believe them?"
No one can legally remove accurate and timely information from a credit report. Only time, a conscientious effort, and a personal debt repayment plan will improve your credit report.
Everyday, companies appeal to consumers with poor credit histories. In exchange for a fee, they promise to clean up your credit report so you can get a car loan, a home mortgage, insurance, or even a job. The truth is, they can’t deliver. After you pay them hundreds of dollars in advance, these companies do nothing to improve your credit report; many simply vanish with your money.
The Warning Signs
If you decide to respond to a credit repair offer, beware of companies that:
The truth is you can help yourself to re-build a better credit record. Start by contacting your creditors as soon as you realize you can’t make the payments. If you need help working out a payment plan and a budget, contact your local credit counseling service. There are non-profit groups in every state that offer credit guidance to consumers. These services are available at little or no cost. Also, check with your employer, credit union or housing authority for no- or low-cost credit counseling programs.
In addition, you have specific rights under the Fair Credit Reporting Act:
Easy Credit? Not So Fast: The Truth About Advance-fee Loan Scams
Advance-fee loan scams "guarantee" or represent a "high likelihood of success" that the advertiser will be able to get or arrange a loan or other form of credit for a consumer, regardless of the consumer’s credit history. These scams differ from legitimate, guaranteed offers of credit in one critical way: they require payments up-front, before the lender is identified and the application is completed. The fee may range from $100 to several hundred dollars. Legitimate lenders may require consumers to pay application, appraisal, or credit report fees, but these fees never are required before the lender is identified and the application is completed. In addition, the fees generally are made payable to the lender, not the broker or arranger of the supposed "guaranteed" loan or extension of credit.
Legitimate lenders rarely guarantee a loan or extension of credit before evaluating a consumer’s creditworthiness. However, there are legitimate guaranteed offers of credit. For example, guaranteed offers of credit cards or other extensions of credit do not require any payments up-front for a consumer to accept the offers. These are firm offers of credit that require a consumer to accept the offer; they are advance-fee loans only if they offer the consumer the "opportunity to apply" for credit.
Advertisements that promise loans generally appear in the classified section of newspapers and magazines. Often, the ads feature "900" telephone numbers, which result in charges on your phone bill. Advance-fee loan scams also are promoted through direct mail and radio and cable TV spots. The appearance of an ad in recognized media outlets — such as your local paper or radio station — does not guarantee the legitimacy of the company behind the ad.
You can avoid advance-fee loan sharks. Here’s how:
Home Equity Scams: Borrowers Beware
"I don’t have much income and I need money. A local lender is offering me a home equity loan. Is this a good idea?"
You could lose your home and your money if you borrow from unscrupulous lenders who offer you a high-cost loan based on the equity you have in your home. Certain lenders target homeowners who are elderly or who have low incomes or credit problems — and then try to take advantage of them by using deceptive practices. Be on the lookout for:
Equity Stripping: The lender gives you a loan, based on the equity in your home, not on your ability to repay based on your income. If you can’t make the payments, you could end up losing your home.: The lender gives you a loan, based on the equity in your home, not on your ability to repay based on your income. If you can’t make the payments, you could end up losing your home.
Loan FlippingLoan Flipping: The lender encourages you to repeatedly refinance the loan and often, to borrow more money. Each time you refinance, you pay additional fees and interest points. That only serves to increase your debt.
Credit Insurance PackingCredit Insurance Packing: The lender adds credit insurance to your loan, which you may not need.
Bait and SwitchBait and Switch: The lender offers one set of loan terms when you apply, then pressures you to accept higher charges when you sign to complete the transaction.
Deceptive Loan Servicing: The lender doesn’t provide you with accurate or complete account statements and payoff figures. That makes it almost impossible for you to determine how much you have paid or how much you owe. You may pay more than you owe.: The lender doesn’t provide you with accurate or complete account statements and payoff figures. That makes it almost impossible for you to determine how much you have paid or how much you owe. You may pay more than you owe.
Some of these practices violate federal credit laws dealing with disclosures about loan terms, discrimination based on age, gender, marital status, race, or national origin; and debt collection.
You also may have additional rights under state law that would allow you to bring a law suit.
If you’re thinking about using your home as collateral for a loan, be careful. Unless you can make the loan payments out of current income, you could lose your home as well as the equity you’ve already built up. Some other tips to remember:
In addition, shop around for the best loan terms and interest rates. Contact lending institutions, such as banks and credit unions, and consult a legal or financial advisor, or someone you can trust before you make any loan decisions. Or contact your local Fair Housing Office, legal aid, or senior services organization for information and help.
Identity Theft Can Ruin Your Good Name
If your wallet is lost or stolen:
A lost wallet is just one way identity thieves can steal your personal information and wreak havoc with your personal finances. Others methods include:
Minimize Your Vulnerability
File Segregation: A New Credit Repair Scam
File Segregation is illegal. If you use it, you could face fines or even a prison sentence. If you have filed for bankruptcy, you may receive a letter from a credit repair company that warns you about your inability to get credit cards, personal loans, or any other types of credit for 10 years. For a fee, the company promises to help you hide your bankruptcy and establish a new credit identity to use when you apply for credit. These companies also make pitches in classified ads, on radio and TV, and even over the Internet.
If you pay the fee and sign up for the service, you may be directed to apply for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). Typically, EINs — which resemble Social Security Numbers — are used by businesses to report financial information to the IRS and the Social Security Administration.
After you receive your EIN, the credit repair service will tell you to use it in place of your Social Security Number when you apply for credit. They’ll also tell you to use a new mailing address and some credit references.
The Catch: False Claims
To convince you to establish a new credit identity, the credit repair service is likely to make a variety of false claims. Listen carefully; these false claims, along with the pitch for getting a new credit identity, should alert you to the possibility of fraud. You’ll probably hear:
Claim 1: You will not be able to get credit for 10 years (the period of time bankruptcy information may stay on your credit record).
Each creditor has its own criteria for granting credit. While one may reject your application because of a bankruptcy, another may grant you credit shortly after you file for bankruptcy. And, given a new reliable payment record, your chances of getting credit will probably increase as time passes.
Claim 2: The company or "file segregation" program is affiliated with the federal government.
The federal government does not support or work with companies that offer such programs.
Claim 3: The "file segregation" program is legal.
It is a federal crime to make any false statements on a loan or credit application. The credit repair company may advise you to do just that. It is a federal crime to misrepresent your Social Security Number. It also is a federal crime to obtain an EIN from the IRS under false pretenses. Further, you could be charged with mail or wire fraud if you use the mail or the telephone to apply for credit and provide false information. Worse yet, file segregation likely would constitute civil fraud under many state laws.
Know the Rules, Use the Tools
The Federal Trade Commission enforces credit laws that protect your right to obtain, use and maintain credit. These laws do not guarantee that everyone will receive credit. Instead, the credit laws protect your rights by requiring businesses to give all consumers a fair and equal opportunity to receive credit and to resolve disputes over credit errors.
The Fair Credit Reporting Act
Your credit payment history is recorded in a file or report. These files are maintained by credit reporting agencies (CRAs). One type of CRA is commonly know as a credit bureau. You have a credit record on file at a credit bureau if you have ever applied for a credit or charge card account, a personal loan, insurance, or a job. Your credit record contains information about your income, debts and credit payment history. It also indicated whether you’ve been sued, arrested or have filed for bankruptcy.
The FCRA is designed to help ensure that CRAs furnish correct and complete information to businesses when evaluating your application.
The Credit Repair Organizations Act
By law, credit repair companies must give you a copy of the "Consumer Credit File Rights Under State and Federal Law" before you sign a contract. They also must give you a written contract that spells out your rights and obligations. The law also contains specific consumer protections.
The Fair Credit Billing Act and the Electronic Fund Transfer Act
It is important to check credit billing and electronic fund transfer account statements regularly. These documents may contain mistakes that could damage your credit status or reflect improper charges or transfers. If you find an error or discrepancy, notify the company and contest the error immediately. These laws establish procedures for resolving mistakes on credit billing and electronic fund transfer account statements. They also protect your credit rating while a transaction is in dispute and limit your liability for unauthorized electronic fund transfers.
The Truth in Lending Act
It is important to shop around to get the best deal on credit. Federal law requires disclosure of the "finance charge" and the "annual percentage rate" (APR) — and certain other costs and terms of credit — so that consumers can compare the price of credit from different lenders.
Equal Credit Opportunity Act
This law prohibits credit discrimination on the basis of sex, race, marital status, religion, national origin, age or receipt of public assistance. Creditors may ask for this information (except religion) in certain situations, but may not use it to discriminate when deciding whether to grant you credit.
The ECOA protects consumers who deal with companies that regularly extend credit, including banks, small loan and finance companies, retail and department stores, credit card companies and credit unions. Everyone who participates in the decision to grant credit, including real estate brokers who arrange financing, must follow this law.
The Home Equity Loan Consumer Protection Act
Your home may be your most valuable asset. It is important to carefully read and understand all aspects of your credit agreement. This law requires lenders to disclose terms, rates and conditions for home equity lines of credit with the applications and before the first transaction under the home equity plan. If the disclosed terms change, the consumer can refuse to open the plan and is entitled to a refund of fees paid in connection with the application. The law also limits the circumstances under which creditors may terminate or change the terms of a home equity plan after it is opened.
The Fair Debt Collection Practices Act
You are responsible for your debts. If you fall behind in paying your creditors or an error is made on your account, you may be contacted by a "debt collector." A debt collector is any person, other than the creditor, who regularly collects debts owed to others. This includes lawyers who collect debts on a regular basis.
The law is designed to eliminate abusive, deceptive and unfair debt collection practices. It applies to personal, family and household debts. This includes money owed for the purchase of a car, for medical care or for charge accounts.
Solving Consumer Problems
No doubt you’ve purchased a product or service that you weren’t happy with. Rather than accept the situation, you could choose to take action. After all, reputable businesses want to keep you happy so you’ll keep coming back.
Here’s how to do it effectively. Discuss your complaint with the seller first. If the first person you talk to cannot help, go to the manger and continue up the line until you receive satisfaction.
If necessary, write a letter to the consumer affairs office or the company’s president. Most often, management is grateful when you bring a complaint to their attention. It can help them identify problems that could be bad for business. An effective complaint letter should be clear and concise, and include all the facts. Include copies — not originals — of documents regarding your complaint, such as sales receipts, repair orders, warranties, and any correspondence with the company. Your complaint letter might look something like this sample.
You may want to send your letter by certified
mail, return receipt requested.
If you cannot get satisfaction with the merchant or manufacturer, contact the following state and local organizations for help:
If you’re not sure what federal agency has jurisdiction over your inquiry or complaint, contact the Federal Information Center (FIC). It’s listed in the U.S. government section of your phone book.
Finally, many consumers and businesses use dispute resolution programs — mediation and arbitration — as alternatives to going to court. Some businesses require consumers to arbitrate their disputes and waive their right to go to court. Check your contract or product packaging for details.
Some programs are free. Others charge a flat fee or a rate based on your ability to pay.
The following organizations can help you find a program near you:
National Institute for Dispute Resolution (NIDR), 1726 M Street, NW, Suite 500, Washington, DC 20036; (202) 466-4764. Or visit NIDR online at www.crenet.org.