Credit has existed for hundreds of years. The concept of buying items now and paying for them later has been documented throughout various civilizations, past and present. Even in modern times, as Bankrate detailed, the concept of a credit line has experienced an expansive history. For instance, rural general stores provided credit to farmers and other citizens. This method was often tracked through rudimentary methods by today's standards. There were no credit cards. Instead, store owners kept mental tabs, and recorded everything in ledgers. As more citizens moved to cities, large department stores also offered credit.
Over time, stores handed pieces of cardboard and then metal Army tags to track credit. As the years passed, the plastic credit cards known to consumers today became the standard. While convenient, this form of accessibility led some consumers toward developing bad spending habits. Most financial experts will only recommend you use credit for important instances, and even then, you should always pay your balance off in full every month.
However, life and money are not always that easy. It's sometimes impossible to stem credit card usage, especially in tough economic times, such as unemployment. Using credit cards helps individuals establish personal credit scores. The importance of this three digit number cannot be overstated. If a person's credit score is too low, they will have difficulty purchasing a car or obtaining a mortgage. The higher the number, the more reliable the borrower is. For those with low scores, there are ways to build it back up. You'll have to be careful and avoid potential scams.
Repairing your credit score
The standard for credit scores is known as FICO, which is short for Fair Isaac Corporation. Created in 1956, the company's service helps millions of consumers manage their credit. Credit scores fall within the 300-850 range. Borrowers on the low end represent a greater risk for lenders.
Scores are based on five components: types of credit in use, length of history, amounts owed, payment history and new credit. Rebuilding credit, while a simple concept to understand, is not always easy to execute. Individuals should always strive to pay off the monthly balance, and any missed payments or high account balances will contribute to a lower score.
However, some predatory schemes exist that claim to help rebuild credit scores. In a Los Angeles Times personal finance column, Liz Weston advised readers to avoid the so-called credit card repair industry. Companies in this sector will say they can help individuals rebuild their credit, but in most cases, their promises are not true.
In an interview with the National Consumer Reporting Association, the Federal Trade Commission's Chicago regional director, Steven Baker, said there has never been a single legitimate credit card repair business.
What to look out for
Individuals can always turn to the Consumer Credit and Protection Act to see what is and isn't legal. You'll know a credit repair business is promoting false promises if they ask you for an upfront fee to create an account with them, or if they ask you to pay for a supposedly free credit report. According to the Federal Deposit Insurance Corporation, both actions are illegal.
"There has never been a single legitimate credit card repair business."
Other red flags center around where the business is located. For instance, internet-based companies that only communicate through email should be avoided, even if they appear legitimate. Finally, credit repair businesses who appear as merchant vendors on online payment services such as PayPal, or do not accept credit cards for associated costs, should raise suspicion.
Why you should avoid them
The Washington Post said the credit repair industry is one of the fastest growing sectors in the U.S. These services often trick low-income individuals and those in dire need of financial help into signing up for the service. In most cases, these businesses boasted positive testimonials and guarantees of fixing credit scores in as little as one month. As the publication reported, the FTC receives approximately 2,000 complaints a year and has thus far pursued 160 legal cases against these services. Unfortunately, most related scams go unreported, and it's entirely possible there are thousands more complaints.
As a consumer, you have to be smart with your finances. Whether you're in the midst of difficult economic times or are financially secure, always consult with your bank or financial team for your best course of action. When it comes to rebuilding credit, the surest way is to pay off your debt, even if it takes months or years. You shouldn't have to pay a third party to fix your credit score.
You may have to make some difficult life decisions to help you quickly pay off credit card debt, but you'll have a much better financial future when banks see you're a reliable borrower.
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