A little history about credit repair companies
Millions of consumers are denied credit based on false information stored in their credit reports. The problem is widespread: One in five Americans has false data in their reports. This essentially means that you or someone close 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 expertise that most people lack. Therefore, many turn to credit repair companies to do the work for them. Unfortunately, doing so is not always a good choice.
There are many reputable companies that provide good service at a reasonable price; however, many credit repair organizations break the rules. Seems pretty ineffective considering you hired them to make your life easier, right?
Credit repair is a highly regulated activity: Companies must provide accurate information about what they can accomplish, and they are not allowed to charge customers upfront. They can only receive payment after they have provided a service.
the repression
Organizations like the Consumer Financial Protection Bureau (CFPB) are very active in suing credit repair companies that break the rules. Rest assured, the FTC regularly prosecutes the worst offenders.
Recently, the number of cases against credit repair organizations has increased significantly, and most of these cases are the result of illegal advance payments. Since advance payments are illegal, why have so many organizations taken the risk?
freezing point
Well, to understand the problem, we need to take a look at the way these companies are paid.
Most of these companies rely on electronic payments, either through the web or by phone. To process these payments, they require the services of a bank authorized to deal with credit associations (Visa, MasterCard and/or American Express). The credit repair company uses your approved “business accounts” to process payments.
Several banks and their agents have recently 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 in the coming months.
Credit repair companies are considered high risk for several reasons. First, there are the general consequences of the misleading claims made by some of the companies. Although some companies are completely honest with their customers, the entire industry is hurt by the few who mislead them.
These false claims lead to customer complaints, chargebacks, and refund requests. All of which reflects badly on the banks and their agents. As if you needed to add insult to injury!
Another problem is the high rate of cancellation in the credit repair industry. A cancellation occurs when a bank is unable to collect the fee from a customer. While credit repair companies tend to attract clients with poor credit management histories; subsequently, the industry has a much higher churn rate than usual.
The combination of these factors makes credit repair agencies a bad risk for banks. As a result, several banks have closed their business accounts without notice. This also affects accounts opened through Independent Selling Organizations (ISOs), which provide business account services through banks. ISOs essentially work as agents for banks, selling their business services to new clients.
The overall effect on the market
Each of these banks sponsors a large number of ISOs and MSPs (Membership Service Providers, essentially the same as ISO). Consequently, the impact on the credit repair industry has been catastrophic.
Having your account frozen is a big deal: It means you can no longer accept electronic payments, and your existing balance is being held in escrow pending investigation. The investigation can take up to 270 days, meaning the company’s cash flow is effectively dead or frozen.
Not to mention, it’s virtually impossible for a business to open a new account once the old one has been frozen. All businesses depend on cash flow to keep their doors open and their staff paid. Very few credit repair companies are in a position to survive for 270 days without funds. In desperation, some companies have started (illegally) charging customers in advance. Since 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 undoubtedly lead to further lawsuits and prosecutions.
Looking ahead, we can expect most credit repair agencies to close their doors as the cost of staying in business proves too high. The few that can weather the storm will emerge as market leaders.
On the one hand, this is good for consumers: companies with poor customer service and misleading information will be among the first victims. At the same time, reputable credit repair companies are also reeling from the hit, 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 highest price: a lack of competition will likely 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 option is a reputable company with a proven track record, no outrageous or illegal fees, and the resources to stay in business. Today, consumers would be wise to steer clear of smaller businesses that may not survive in today’s climate.
