credit,  personal finance

Questionable business practices in the debt and credit industry

Some people might find this information useful – either for themselves or someone they know.

CREDIT REPAIR COMPANIES

Before discussing them, I want to point out that if you’ve found a legitimate error on your credit report, you can file a dispute with the credit bureau at no cost to you. And it will subsequently investigate and fix the error.

Here’s where you can file a dispute with Equifax and here’s where you can file a dispute with Trans Union.

Now, what if there are no errors on your credit report but there’s negative information on it? Can you have it removed?

Unfortunately, unless there’s been an error made by one of your creditors, negative information won’t be removed from your credit report.

However, credit repair companies claim that they can remove negative information from your credit report, even if it’s legitimate. Here’s how they do it:

  1. First, they charge you a fee that you’ll have to pay up front.

  2. They’ll help you file a dispute with the credit bureau, which I explained how to do at the beginning of this section.

  3. The negative information will be temporarily removed from your credit report while the credit bureau conducts its investigation. The credit repair company informs you of its success in removing that negative entry and you’ll be happy.

  4. However, once the credit bureau completes its investigation and determines that the negative information was legitimate, that information will be put back onto your credit report. And good luck getting a refund from the credit repair company.

CREDIT BUILDER LOANS

Such a loan is a method for someone with no credit history or a low credit score to build his or her credit

I’m going to explain how they work and why getting such a loan is probably a bad idea

Suppose you obtain a credit builder loan for $3,000 at an annual interest rate of 12%, repayable over 3 years

You don’t get that $3,000. The lender deposits that money into a Certificate of Deposit (CD). That CD may or may not earn any interest. For ease of exposition, let’s assume that it doesn’t pay interest.

The lender only releases the $3,000 to you once when you’ve finished paying off the loan, plus interest.

Therefore, if you borrow $3,000 at an annual interest rate of 12% repaid over 3 years, you’d be paying to the lender $3,587 over three years in order to receive the $3,000.

In other words, you’d be paying the lender $587 in interest for $3,000 of funds you never even get to use.

Although this might be a good way of rebuilding your credit, it makes very little financial sense.

This type of loan might make sense if the CD paid a rate of interest high enough to offset the interest you’re paying on the loan. For example, if you were earning 10% per year on your $3,000 CD but paying 12% on the loan, the net interest you’d be paying is 2% per year. You can look at the 2% net interest rate you’re paying as the price of rebuilding your credit. But there’s no chance any lender is going to pay you such a high rate of return on a CD.

A better way to rebuild your credit would be to obtain a secured credit card from a company such as Capital One.

DEBT CONSULTANTS

You’re in financial trouble and you’ve performed some search queries on the internet for debt consultants. Chances are you’ve come across a number of websites for:

“debt and credit specialists”

“debt management experts”

“debt relief experts”

“debt consultants”

A typical example of the claims they make is that they’ll help you to reduce your debt by up to 80%.

These companies have no ability to reduce your debts at all. Rather, they’ll charge you steep fees (from $2,000 and up) to simply act as an intermediary between yourself and a Licensed Insolvency Trustee so that you can file a consumer proposal to legally settle your debts with your creditors. Only an LIT can file and administer a consumer proposal.

You’re probably asking yourself: “Why would any self-respecting LIT want to work with these companies in the first place?”

LITs are regulated by the Office of the Superintendent of Bankruptcy and you can read their report on LITs who participate in this type of arrangement with debt consultants.

Victor is the President of Fong and Partners Inc. He is a Licensed Insolvency Trustee and Chartered Professional Accountant. With many years of experience in the insolvency field, Victor has been involved in both corporate and consumer insolvency engagements. Previously with a large national firm, Victor founded Fong and Partners Inc. so that he could dedicate his professional life to help people from all walks of life to deal with their debt.