Is Credit Repair Legal? Here is the Truth

Written by Kim PinnelliUpdated: 1st Sep 2021
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Rest assured; credit repair is legal in the United States. In fact, it is legal in all 50 States. Credit repair is a long process but is required when trying to rebuild your credit and increase your credit score.

Most people repair their credit after their credit score has been damaged due to unforeseen circumstances, financial setbacks, identity theft, or inaccurate reporting.

However, the main reason people must repair their credit is due to poor financial habits. This can range from missing too many payments, incurring too much debt, repossession, or filing for bankruptcy.

Since repairing your credit is an arduous process, people turn to credit repair companies for assistance. But before you choose which company to work with, you need to understand the laws that govern their actions.

Federal Laws Governing Credit Repair

Passed in 1996, the Credit Repair Organization Act (CROA) is a federal that regulates credit repair organizations. Essentially, this law governs all entities whose primary purpose is to increase a businesses or consumers credit score.

To ensure compliance of the CROA, the Federal Trade Commission (FTC) enforces the laws outlined in this act. They have the ultimate authority and can shutter a credit repair firms operation if they employ illegal or fraudulent activity.

Want to Learn More? Do Credit Repair Companies Really Work?

Credit Repair Organizations Act (CROA) Overview:

CROA is straightforward to the point. It outlines exactly what a credit repair company can and can’t do. The language is not overly complex, and it was enacted to protect consumers. The CROA mandates (our interpretation):

  • Credit Repair Firms can’t mislead consumers. Put simply, they can’t make any promises to you. For example, a company can’t promise you that your credit score will increase by 100 points after one-month worth of work.
  • Contractual Agreement Required. Both you and the credit repair company need to sign a written contract. Customers can cancel the contract after three days.
  • Guaranteed Refund. If the credit repair company violates any portion of the CROA, you can sue the organization and get a full refund (included attorney’s fees and any associated damages).
  • No Up-Front Fees. Companies cannot request a payment until services are rendered. However, most companies will include an additional “first work fee.” This is usually applied on top of the monthly fee most credit repair companies charge.
  • The CROA is the supreme document. State Law’s cannot override what is outlined in the Credit Repair Organization Act.

These laws safeguard consumers from shady business practices and poor marketing tactics. So, it is a great thing the Credit Repair Organization Act exists.

Do Credit Repair Companies Need a States License?

While laws will vary per State, credit repair companies need to apply for and obtain an occupational business license. Additionally, they will need a surety bond. Most businesses need to be bonded to legally operate.

If you want to learn more about each State’s laws that govern credit repair businesses, contact your State Attorney General.

What Can Credit Repair Companies Do?

It is important to note that credit repair companies can’t do anything you can do yourself. However, they bring years of experience to the table and are staffed by a team of experts, so they can speed up the process and do it for you.

But if you want to go a more DIY approach, then check out our guides:

So, if a credit repair company is telling you that they can do things that you cannot, they are flat out lying. This is a clear sign that this company is a credit repair scam.

Furthermore, another scam to watch out for is if a credit repair company states they can get negative items removed from your credit report if it is 100% correct. It is impossible. If a derogatory mark is valid, you cannot remove it.

The only thing you can do from this point is to take the right steps to build your credit.

Credit repair is legal. Make sure you read the Credit Repair Organizations Act (CROA) and verify the company you are about to work with is legit. Read previous customers reviews, speak to a representative, and see what they have to offer. If you need some additional insight, check out our list of the best credit repair companies.

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Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.