Credit Users Beware

Most of us use credit cards and do so wisely. However, as with any legitimate line of business, scammers have devised elaborate means of swindling consumers, through credit-related fraud. This is especially true for those consumers who get themselves deeply in debt. Credit-related fraud has at least four or five variations, possibly more. Protect yourself by learning to recognize these rip-offs.

We live in an age of plastic money. It's a rare soul these days who doesn't have at least one credit card and most of us have several. When used prudently and with common sense, credit can make our lives easier. However, not everyone uses credit wisely and scammers are waiting in the wings to take advantage of that fact.

Don't fall prey to credit scammers. Here are three common types of credit-related fraud:

Credit Repair Clinics

If your money problems are serious and you currently have a bad credit rating, beware of the credit repair clinics, also known as credit doctors. Desperate to find a solution to their overwhelming money problems, people fall prey to fix-it frauds, spending hundreds of dollars for little or nothing.

Kim Donahue, an Education Coordinator for the Consumer Credit Counseling Service in Indiana points out, "these companies usually charge anywhere between $100-$500. They can have a flat fee or charge on a per item basis. Repairing bad credit has even turned into a work-from-your-home scam."

The credit repair rip-offs operate by taking advantage of the Fair Credit Reporting Act, a federal law that affirms your right to have reasonable access to your credit report. If you believe there's a mistake in the report, you can notify the credit reporting agency. In turn, the agency contacts the creditor to find out if the information on file is accurate. If the information is wrong, it's changed. If correct it stays on the report. Finally, if the creditor doesn't respond in 30 days, the agency must automatically drop contested data from the report.

The repair shops flood the credit agency with verification requests, assuming some are bound to fall through the cracks. There's also the chance items may be deleted because creditors didn't have time to respond. In this bulk of paperwork things can get missed, however if the original information is correct, it will likely get reverified by the creditor the very next month. Keep in mind, anything a credit repair company claims it can do, you can do for yourself.

File Segregation

Another credit fraud is rising to the fore. It's known as file segregation, a take-off on identity fraud. These crooks claim that by obtaining/using an employee tax ID number that looks like a social security number, they can create a new credit identity. That way, whenever a business runs a credit check using your name and new number, they won't find any negative information.

Two organizations, the Federal Trade Commission and the National Association of Attorneys General, recently filed 43 law enforcement actions against phony credit companies for file segregation. The defendants are accused of claiming to help consumers obtain new credit histories by substituting federally issued nine-digit employee identification numbers for Social Security numbers.

Sue Loomis learned two tough lessons last year, including a lesson on file segregation. After working two jobs for eight years and still unable to keep up with her high credit card bills, Loomis filed for bankruptcy. She comments, "Within about six weeks of my filing, I received a professional looking envelope in the mail. I didn't quite understand all the jargon, but it basically said I could get my credit back. Admittedly, I was feeling low at that point and I realize now they were tapping into my vulnerability. I sent the money, seventy dollars, and ten days later got a brochure in the mail."

As Loomis soon realized, the brochure and the credit scheme were not legitimate She continues, "The whole idea just sounded wrong to me. I had to chalk that seventy dollars up to experience." She threw the brochure away and made no attempt to obtain any credit, using false ID numbers.

Advance Fee Loans

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 completed. Legitimate lenders may require consumers to pay application, appraisal, or credit report fees, but these fees are never required before the lender is identified and the application completed.

If a telemarketer tells you they're certain they can get you a loan (regardless of your bad credit history) and they attempt to charge you in advance, that's prohibited by law. This applies to telemarketers who offer loans directly, or companies that offer to help you obtain a loan through a third party.

In the typical scenario, a cash and/or credit strapped consumer responds to an ad offering "credit consolidation." The consumer is told he or she qualifies for a loan, but that an advance fee is required. The consumer sends the required fee, often between $100 and $1000 and never gets the "loan" or hears from the company again.

These scammers often get to work just before the holidays, when cash and credit-strapped consumers are looking for any way to get extra money to brighten the Christmas season. According to the National Fraud Information Center, a number of these companies are not even in the U.S., but are operating out of Canada.

Millions of Americans suffering from too much debt and bad credit histories are turning to fraudulent marketers, who charge their customers higher and higher fees for services that either don't work or are just plain illegal. The scammers are taking advantage of consumers ever-growing reliance on plastic. Don't take the bait.