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Credit Repair & Banks at ODDS
A little history on credit repair companies
Millions of consumers are denied credit based on false information stored on their credit reports. The issue is widespread—up to one in five Americans have false data on their reports. This basically means that either you or someone close to you has already been affected by it.
Getting the credit bureaus to remove false information takes time 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 is not always a wise choice.
There are many reputable companies that offer good service at a reasonable price; however, many credit repair organizations break the rules. Seems pretty inefficient 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 are not allowed to charge clients up front. They can only receive payment after providing a service.
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 increased dramatically – and most of these cases are the result of illegal upfront fees. Since advance payments are illegal, why have so many organizations taken the risk?
Well, to understand the point, we need to take a look at how these companies are paid.
Most of these companies rely on electronic payments, either online or over the phone. To process these payments, they require the services of a bank authorized to deal with credit unions (Visa, MasterCard and/or American Express). The credit repair company uses approved “trade accounts” to process 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 suit over the coming months.
Credit repair companies are considered high risk for a number of reasons. First, there are general ramifications from the misleading claims made by some of the firms. Although some companies are completely honest with their customers, the entire industry is harmed by the few who deceive them.
These false claims lead to customer complaints, chargebacks and refund requests. All these reflect badly on the banks and their agents. If only you had to add insult to injury!
Another issue is the high fee 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 credit management history; subsequently, the industry has a much higher than usual charging rate.
The combination of these factors makes credit repair agencies a bad risk for banks. As a result, some banks have closed their merchant accounts without warning. This also affects accounts opened through Independent Sales Organizations (ISOs), which provide merchant account services through banks. ISOs essentially work as agents for banks, selling their trading services to new customers.
The overall effect on the market
Each of these banks sponsors 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 someone’s account blocked is a big deal – it means you can no longer receive electronic payments and your existing balance is 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 is virtually impossible for a company to open a new account once the old one is frozen. All companies depend on cash flow to keep their doors open and their staff paid. Very few credit repair firms are able to survive 270 days without funds. Out of desperation, some firms have started (illegally) charging clients 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 dangerous move and will no doubt lead to more lawsuits and prosecutions.
Looking ahead, 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 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 victims. At the same time, credit repair companies in good standing are also reeling from the blow, and some will undoubtedly falter and fail. Competition is healthy in any market. It keeps prices down and forces companies to provide better service.
On the other hand, it may be consumers who ultimately pay the biggest price – the 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 for 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, no outrageous or illegal fees and the resources needed to stay in business. In this day and age, consumers would be wise to stay away from smaller firms that may not survive in the current climate.
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