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Why Paying for Credit Repair is Stupid

Why Paying for Credit Repair is Stupid

by 
Paula Langguth Ryan, Mediator, Consumer Advocate and Communications Consultant.

Every week, people contact me wanting advice on how to get their FICO or credit score up over the 700 mark. Here’s the first question I ask them: Which would you rather increase by 38% in six months– your FICO score or your net worth?

The problem is, raising your FICO score is designed to get you new credit at better interest rates. New credit after a financial challenge like job loss, bankruptcy or foreclosure does NOT equal financial freedom. Or increase your net worth.

In most cases, raising your FICO score means just the opposite. Getting new credit too quickly simply leads you back into debt making monthly payments, then minimum payments, and then possibly sending you back into bankruptcy again.

That’s exactly what happened to Stephen Snyder, founder of the After Bankruptcy Foundation. He and his wife Michelle declared bankruptcy a second time in July 2012. They rebuilt their credit score after their first bankruptcy and wound up with $18.6 Million in debts and only $176,591 in assets. A far cry from a positive net worth by any measure.

Now, Steve is letting folks know that it only took him six months after his latest bankruptcy to increase his scores by 38% – from 568 to 783. On paper this looks awesome. But in reality this is a set up for a three-peat visit to bankruptcy court. Something I’m assuming you’d like to avoid.

How did Steve Snyder achieve the coveted 700+ FICO score? He built his credit back up using a “credit fixer” company called Allen Michael (a company Mr. Snyder helped found). Allen Michael prides itself on being able to purge negative items off your credit reports – including your bankruptcy.

With credit fixers, you pay an initial fee and then a monthly fee while the fixer works to remove items until your credit score rebounds. Then you can run out and get a new car, credit cards, buy a house and so on after your bankruptcy.

The glitch with fixing your credit score is that you never get to the root of the problem. You never fix the habits and choices that led you into debt. Instead, you repeat the cycle of building up debt until each month finds you scrambling to pay these new bills. You wind up praying for the day to come when you’re eligible for another bankruptcy eight years down the road. Eight years you could spend building true wealth for yourself and your family.

Yes, your credit got mauled. But think of it this way. Imagine you stuck your hand in a lion cage and got mauled. Using a credit fixer to “clean” true negative credit off your credit report is like amputating your arm so you don’t have to think about how you got mauled in the first place.

Deleting true, negative information also creates an internal belief that you’ve cheated the system, which sets up an ethical dilemma within yourself. Psychologically, this ethical dilemma will sabotage your efforts to create true, lasting wealth and financial security.

Once the evidence of your credit being mauled has been removed, there’s no reminder NOT to put your other, intact arm into the cage… which is what you do when you jump at new credit offers. Walking up to a new creditor and saying “Nice kitty. Nice kitty,” isn’t going to change the lion’s (creditor’s) reaction. They’re going to reach for your remaining arm – and the shirt off your back, too.

Instead of trying to erase the true negative information on your credit reports, take the slow and steady approach. Focus primarily on rebuilding your net worth and make rebuilding your credit a secondary goal.

Let’s run the numbers. Let’s say your net worth right now is $1,000. If you focus on steps that increase your net worth by 38% every six months, you’d turn that $1000 into $1760 in a year. And you wouldn’t be paying any of that money out as interest. Keep up that kind of growth each year and, in eight years, you’d have a net worth of $92,000 or more.

Remember: creditors aren’t in the business of helping you have those “priceless” MasterCard moments. They’re in the business of making money. Are you going to help THEM make money or help YOURSELF make money?

Paula Langguth Ryan is the author of Bounce Back from Bankruptcy and the forthcoming Break the Debt Cycle – For Good. Download her free e-book Do’s and Don’ts of Credit After Bankruptcy and her free e-book and workbook, Heal Your Relationship With Money at www.paulalangguthryan.com/freestuff to get to the root of and heal your financial beliefs. She can be reached at 970-590-3732 or via email at [email protected]. Follow her on Facebook or Twitter at PaulaLangguth

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  • http://lazytravelers.net/ Andy Shuman

    I have a conflicting feeling about this article. I agree that paying for credit repair is stupid but for another reason: they usually do not deliver. It’s as simple as that. There is only so much you can do against legit negatives in your credit file, and I’m very sceptical of that guy’s 6-month rebuilding claims. I mean, sceptical to the point of disbelief.

    There are two major sources of credit “repair” information, and they are readily available for free to anyone who wants to apply an effort, Creditboard and Myfico forums. You need to read a lot before you begin asking questions, but they really have more information than you will ever need.

    As far as moral dilemmas go, we don’t live in a perfect world. When one loses her good credit standing, there are other implications than an inability to get new credit. Everyone is checking your credit history nowadays. All of sudden, your employer promotes someone else (or you can’t get a job in the first place). Your car insurance rates go up and your rental applications get denied. That bankruptcy that according to your lawyer was supposed to bring you financial relief turns out to be quite an expensive proposition. It’s hard to increase your net worth when you have to settle for a lousy job or get ripped off by a slamlord.

  • http://www.zipdebt.com/ Charles Phelan

    Reading this excellent article reminded me of something I learned many years ago in college from my professor of marketing. Teaching evening classes in marketing was just something he did for fun. He made his living installing in-ground swimming pools. The professor told our class that his absolute favorite sales prospects were homeowners who had just recently completed a bankruptcy discharge! At first we all thought he was nuts, of course. Why would a business owner purposely target people who had just demonstrated they were willing to walk away from their debts? “No problem at all,” he said. “These are people who are desperate to rebuild their credit, and my financing contract will help them accomplish that. They can’t file bankruptcy on me for a long time, and they don’t have any other debts! So I know that I will get paid as a top priority. They are the perfect captive audience for my sales pitch. I will close that sale every time.” Recently broke. New swimming pool anyway. That’s capitalism at its finest for you. :-)

  • Fitz

    Great piece. Hopefully folks will get it

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