What Is File Segregation? The Reality of a Credit Repair Scam
Posted on October 8, 2010
We’ve all seen the ads from seemingly reputable companies promising to repair our credit histories and erase all the negatives that are preventing us from being creditworthy to lenders. The companies guarantee there is a fix for bad credit and for those desperate in debt and facing credit issues, the guarantee sounds like the perfect resolution.
The problem for consumers is there is no resolution, let alone an overnight credit fix. Scammers are finding more intelligent ways to lure in consumers and take their money. Not only are the scammers profiting from desperate debtors, they are also placing their customers in danger of engaging in illegal practices.
File Segregation, A Popular New Trend
Advertisements for credit repair companies often include promises of guaranteed fixes for bad credit histories. Consumers jump at the chance to have the bad marks erased so they can secure financing. There are many ways a company says they can improve your credit and one of the newer trends in credit repair scams refers to file segregation.
How It Works
File segregation involves establishing a new credit identity. This may sound like the ideal solution for someone with bad credit but the reality is file segregation is illegal. The process involves signing up for the service. You pay an upfront fee that is typically a high amount. Once committed, the repair company will refer you to the IRS where you are instructed to apply for an Employee Identification Number (EIN).
An EIN is similar to a person’s Social Security Number but are for use by businesses when reporting financial data to the Internal Revenue Service and the Social Security Administration. The IRS will provide you with an EIN relatively quickly.
The point of establishing an EIN, as you will be told, is to use the new identification number in place of your Social Security number when applying for a new line of credit. You will also likely need to use a different mailing address.
Companies that provide ‘new credit files’ or promise a clean slate will use some common pitches to get you in the door. Unfortunately, nothing they say is usually completely true. A common pitch is the fact that developing a new credit identity is legal. It most certainly is not legal and can result in the consumer going to jail or paying stiff fines for defrauding the government which is a felony crime in the US. No part of the government supports this method of credit repair regardless of what companies are promoting.
Companies may also downplay your ability to get credit with bad marks on your history report. While it is true that lenders will look unfavorably upon a bad track record, it is not true that you will never be able to repair your credit on your own. Regardless of how bad a credit history is, there are many legal options for improving your credit report and score.
Avoiding the Scam
By law, a credit repair agency must provide a statement in writing that outlines what services are to be rendered and how long it will take to see results. They must also provide you with an invoice of total costs involved and provide a written testament as to any and all guarantees being offered. Consumers also need to be aware that should they sign up with a credit repair agency and then reconsider, they have three days to cancel the contract at no additional charge.
If you feel you have been the target of an illegal credit repair scam, contact the district attorney in your local area for more information about reporting the scam and seeking reimbursement for expenses paid.
- 6 Red Flags of a Credit Repair Scam
- What Should Be In a Credit Repair Contract?
- Do You Need a Credit Repair Company?
- Why Credit Repair Companies Have Such a Bad Reputation
- Laws to Know During Credit Repair and Beyond