Feds Target Bad Credit Shops

The ads promise a chance to reinvent a credit history for as little as $30: "Erase bad credit!" "Brand new credit file in 30 days!" "Start all over again with good credit record!"

Consumers who follow the instructions offered by these businesses may, indeed, end up starting all over again - in prison.

The Federal Trade Commission and National Association of Attorneys General on Tuesday announced legal action against 43 businesses that encourage consumers to set up new credit histories using identification numbers different than their Social Security numbers.

Using a false identification number to apply for credit is a felony, even though these scam operators try to convince consumers that the process is totally legal.

"They prey on people who are plagued by poor credit - people who may be desperate to develop a clean credit history so they can get a loan, get a job or buy a car," said Jodie Bernstein, director of the FTC's Bureau of Consumer Protection.

Oklahoma Attorney General Drew Edmondson, who chairs NAAG's consumer protection committee, calls these cases "just the tip of the iceberg" for a fraud being spread far and fast on the Internet and in newspapers.

The operation works like this: Businesses seek out consumers who have been denied loans or credit cards based on poor credit histories, sometimes sending letters to people who have filed for bankruptcy. For anywhere between $29.95 and $400, the companies promise to provide consumers with instructions on how to develop a new credit identity through a process called "file segregation."

The companies then sell consumers instructions on how to apply to the Internal Revenue Service for an employer or taxpayer identification number. These numbers are intended primarily so businesses can set up a tax account for their filing purposes. And in fact, the IRS on the application form offers this warning: "An EIN is for use in connection with your business activities only. Do NOT use your EIN in place of your Social Security number."

But the scam operations tell consumers to do exactly that - use the numbers instead of their Social Security number in credit reports or loan applications, enabling them to start a fresh new credit record. The FTC claims these scam artists went so far as to advise consumers to get new driver's licenses with the new I.D. number.

Consumers "may have some vague notion that this is a way of getting around something. But they don't understand the true ramifications," says Susan Grant, director of the National Fraud Information Center, a program of the National Consumers League.

The scams are expensive for both businesses and consumers. The Treasury's tax administration inspector general estimates that as much as $400 million in fraudulent loans and credit has been established across the country, a cost that often is absorbed by the businesses providing credit.

Asid from file segregation, other credit repair scam operations have managed to defraud consumers by promising to "clean up" credit histories for exorbitant prices. In 1998, consumers who used these services on average lost $725 to telemarketers promoting fraudulent credit repair services, up from $568 in 1997, according to the National Consumers League.

In fact, consumers can obtain information about their credit history and correct inaccuracies for free.

Legitimate companies also can counsel consumers on how to fix errors in their report and how to rebuild their credit, but they can't simply erase a poor credit history, Grant warns. "If it's not inaccurate, it can't be fixed," she said.

Reported By Kalpana Srinivasan