How to Avoid Credit Card and Credit Repair Scams

In the credit card world, scam operators are taking money from innocent customers without adding value, misrepresenting claims and simply performing shoddy service. Fortunately, customers have an avenue to complain and the FTC has also taken pretty tough actions. Below are some examples of the actions that the FTC has taken against some shady companies. After reviewing these examples, you will realize a common thread among these cases and at the end, I would like to conclude by making a few points on how to avoid being susceptible to such scams. So let’s begin.

FTC vs CompuCredit

CompuCredit is a company that issues sub-prime credit cards (i.e., credit cards for bad credit folks). Below are some of the charges (which they eventually settled) made by the FTC.

Fee-based Visa with $300 limit

The FTC charged CompuCredit for deceptive marketing of their Visa credit cards to consumers with subprime credit ratings. These Visa Cards, which include the Aspire Visa credit card and the Aspen credit card, were marketed in such way to make consumers believe that they would get a credit card with $300 credit limit and with no up-front fees. Instead, CompuCredit immediately charges consumers as much as $185 in fees that it did not adequately disclose. These fees left consumers with as little as $115 in available credit. These fees include:

  • One time application fee
  • One time processing fee
  • Annual fee (which was also billed immediately)
  • Monthly Maintenance fee!

Left out fine print in credit line offers

CompuCredit also marketed to consumers with slightly higher credit scores its Visa credit card offering up to $3,250 in available credit. CompuCredit failed to disclose adequately, that half of the available credit would be withheld for the first 90 days. CompuCredit also failed to disclose that for the first 90 days, the company would monitor consumers’ purchases, and might reduce their credit limit based on an undisclosed behavioral scoring model.

Debt-transfer Visa program

This one was the worse of all. CompuCredit and Jefferson Capital marketed a Visa credit card to consumers with charged-off debt. They represented that the consumers’ old debt balance would be immediately transferred to the card and reported to consumer reporting agencies as paid in full. Consumers who accepted the offer, however, were immediately enrolled in a debt repayment plan and did not receive a Visa card until they paid 25 percent to 50 percent of their charged-off debt.

FTC vs Credit Repair Companies

The FTC has also targeted scores of credit repair companies for deceptive marketing and business practices. In 2008, the FTC cracked down on 33 firms offering credit repair services. Most of these firms made the following outrageous claims:

  1. That they can even remove accurate, negative items from your credit report — This is simply not true in most cases. Things like bankruptcy can stay on your report for as long as 10 years.
  2. Getting “up front fees” and keeping the fees for themselves instead of actually providing the service — It is actually against the law to collect fees before performing any credit repair work. By the way, cleaning and disputing inaccurate credit reports is actually one of the easiest things to do.
  3. Deceptive promises over the phone — The FTC posed as consumers responding to ads from firms like American Credit Experts, Inc. They were told that “everything surrounding your bankruptcy will be removed and late payments are very easy to remove! Turns out that they charge $39.95 to $59.95 initially, then $59.95 per month for their promised services. For this fee, they sent the major credit reporting agencies repeated dispute letters on consumers’ behalf with vague statements about each disputed debt or bankruptcy record, with no explanation or documentation. They keep disputing items even if the credit bureaus and creditors have verified them. And they profit by continuing to charge the monthly fee to their ripped off clients.

Common Threads

If you look at this case carefully, you will realize that there are a few common threads here.

  1. Most of the deceptive terms are hidden under the fine prints (i.e., the terms and conditions). Unfortunately, we all know that most people do not read the terms and conditions.
  2. Companies rely on catchy headlines that prey on human emotions. In the case of these sub prime cards, it is to get easy credit approval, no credit checks, or instant fast approval.
  3. Full upfront fees are not disclosed. The biggest shock is that the full upfront fees are not told to consumers. Because if they were revealed up front, sales will drop dramatically.

These practices are not just confined to the credit card industry. But instead, it is practices in so many businesses. For example, take cable companies. How many bait and switch tactics do you see on TV ads everyday? Get bundled service for only $X for 6 months, but what they don’t tell you is all the fees after that. Another example is weight loss programs. Just look at the promises and testimonials. Lose X pounds in 3 months. Give me a break. How about get rich quick stock trading programs? Many of us fall for these too easily.

How to avoid marketing scams and deceptive marketing

Well, I guess that is the six million dollar question. Here are some tips to help you stay clear of these traps.

  1. Read the fine prints — This is so elementary, but so crucial. Take the extra 10 minutes to go through them.
  2. Never fall for headlines — In my opinion, it’s fine to read an ad if there is a catchy headline. But be very skeptical of their claims. As an example, beware of the “as low as” headline! Many low interest credit cards claim your rate could be “as low as X%”. Truth is that you may get that rate if you have excellent credit. For most folks, that “as low as rate” is just not realistic.
  3. Research a product way ahead of time — Researching a product that you are looking to buy will ensure that you are much more likely to make the right decision. But more importantly, you have to research ahead of time. If you don’t, you will be more tempted by and deceived by great marketing headlines.
  4. Avoid offers that are too good to be true — Lastly, if you take a look at products that have promises that are too good to be true, whether it is “no credit checks”, “instant approval credit cards”, “get rid of negative reports”, or “lose 50 pounds in 8 weeks!”. There are usually better alternatives. For example, instead of using sub-prime credit cards mentioned above, you are better offer getting a secured credit card or prepaid debit cards. Better still, learn to improve your credit score so that you’ll be eligible for normal credit cards.

We all make mistakes. The important thing is that we learn and be careful as a consumer.

Reviewed and updated April 23, 2011.

5 thoughts on “How to Avoid Credit Card and Credit Repair Scams”

  1. Very informative article. An alternative to using your credit card to cover instant expenses is to take a short-term loan.

  2. This may be the more conservative approach to this system but a good rule of thumb is to simply only get credit cards from companies backed by a bank you’ve heard of. Chase, Citi, BofA, etc…

    These banks have too much to lose to try and employ these kinds of deceptive practices on a regular basis. If you can’t get approved for a card at one of these places then it is likely that you should not have a credit card right now.

    Not everyone will do this of course so I’m thankful for the FTC protecting the little guy.

  3. Great article – and the old adage is correct for these scam companies : If it sounds too good to be true, it IS. Unfortunately, we humans are prone to look for the easy-way-out and can rationalize our choices to ‘believe’ or ‘trust’ in our own logic/judgment thinking that these kinds of scams aren’t going to happen to us! The companies in the FTC complaint are the most egregious violators – there are other companies (like Orchard Bank, a division of HSBC) who used to charge ‘account maintenance fees’ that would equate to $240 dollars/year – essentially just for the service of reporting to the credit bureau…But wait! To weakonomist’s point regarding name-brand banks – that’s the same thing Chase tried to do to its customers last fall until one of the states’ atty gen. stepped up and helped put an end to that practice…

  4. Yes there are many headlines that can be misleading and too good to be true, especially around money. However, in the midst of our current age, the information age, it is fast becoming the norm to turn yearly incomes into monthly incomes.

    This is hard to grasp for the person who is so used to job security, until they lose it…which is commonplace today…there is no JOB security.

    I only bring this up so that people might begin to be aware of how the times are changing in favor of the people and not a system, like we currently use of trading our time for a paycheck, that holds people bondage to debt and living paycheck to paycheck. That no longer needs to be the case.

    Great site and great blog.

  5. For me, what I usually practice is how will each promotions benefit the company. Take it from their perspective so you can see if it’s really a scam. A lot of companies use misleading headlines just so they can get their numbers up. They don’t realize how much it will affect their brand and how it can destroy their business.

    For each marketing headline you see, ask yourself, ‘What is the catch?’

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