General

Credit Rating Repair Customer Costs – A Tale of Two Business Models

By Graham Doessel, Founder and CEO, MyCRA Credit Rating Repairs.

 

Graham Doessel is the founder and CEO of MyCRA Credit Rating Repairs – Australia and New Zealand’s leading credit rating repair specialists.

Graham’s origins are in finance, and he formed/owned the award-winning non-conforming brokerage “Mortgage Now.”

Graham is a consistent spokesperson in the media for credit reporting issues in Australia and New Zealand.

MyCRA Credit Rating Repairs, now in its fourth year of operation, has recorded an impressive track record of up to 91.7% rate of removal of inconsistent or inaccurate negative data from the Australian and New Zealand credit reports of both consumers and commercial entities.

MyCRA Credit Rating Repairs uses a fee-for-service business payment model, but recognises that a no-win no-fee business model works for some as well.

Executive Summary

“It was the best of times, and it was the worst of times.” Nothing could be truer for this time in the credit rating repair industry –we are at a turning point.

Consumer demand in recent years has demonstrated the true value of third party credit rating repair.

Unfortunately much of the consumer recognition has been lost from a credibility standpoint under a wave of confusion over the credit rating repair industry’s customer business payment models.

I investigate the two customer payment business models current in the credit rating repair industry, ‘fee-for-service’ and ‘no-win no-fee’ payments.

The fee-for-service business payment model, by its very nature is more transparent, and applies principles which are in the best interest of the consumer – for these reasons:

Upfront fees give the consumer more reassurance they will be told what they are going to get, how much it will cost, and because money has changed hands – the credit rating repairer will be bound to deliver what they have promised.

This model allows the credit rating repairer to give better service to the consumer, through the increased level of commitment by the consumer.

The introduction of a refundable assessment fee takes the benefits of fee-for-service to another level – by assuring those that enter into this business payment model are refunded any monies should they not proceed beyond the assessment stage of credit rating repair.

The difficulty in a fee-for-service model is its restriction on consumers who can’t afford upfront payment, and can’t borrow due to a bad credit rating. At the same time, the fee-for-service credit rating repairer would likely impose less ‘defaults’ on consumer credit files.

In contrast the win no fee business payment model has some significant disadvantages for consumers – particularly where the disclosure of fees and charges are concerned.

Extra costs; and hidden costs dumped on consumers regardless of their success in credit rating repair can lead to confusion and anger over fees and charges.

There is also the potential to skip vital steps in assessment which can lead to an inadequate volume of information prior to the engagement of credit repair – potentially leading to promises of credit repair not based in fact.

Furthermore, should non-payment arise, the company may be forced to place defaults on credit files– a woeful situation that no credit rating repairer wishes to be in.

Despite the disadvantages, the no-win no-fee business payment model has merit due to the ability to help those people who otherwise could not afford credit repair.

In deciding which customer business payment model to adopt for the credit rating repair industry, I address other professions where these debates have occurred.

The financial planning industry is on the cusp of streamlining a fee-for-service payment model across the entire financial planning sector. This has been in response to demand for better transparency to combat criticism of conflict of interest – and uses a ‘best interest’ approach.

This consumer ‘best interest’ approach has strong merit when constructing any best practice customer payment model in the credit rating repair industry.

In the legal arena, the no-win no-fee model popular in personal injury claims has been criticised for misleading advertising and hidden costs, something which the credit rating repair industry should keep in mind when making any reforms.

With both business models having merits for credit rating repair, a number of recommendations across the board on both models would need to be instigated to create a level playing field for consumers.

These include refundable upfront fees plus full disclosure of all fees, charges, terms and conditions on advertising. These changes make customer payments fair and simple to understand.

These best practice reforms to business payment models would create transparency and credibility and would vastly contribute to providing a valid place for credit rating repair in Australasia’s credit reporting landscape in the future.

Credit Rating Repair Customer Costs – A Tale of Two Business Models

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way,” from Charles Dickens, A Tale of Two Cities.

The credit rating repair industry is on the cusp of revolution.

Never before has there been greater demand for credit rating repair, to the point where the market seems flooded with choice for credit rating repair companies. Despite legislation allowing for credit file inconsistencies to be remedied with creditors, consumers are coming to us as credit rating repairers in droves.

But with popularity inevitably comes criticism – and most of it rests with fees and charges.

In the current landscape of professional credit rating repair in Australia there is a great variance in the type and style of customer payment business models offered to consumers.

This has resulted in consumers being unsure what service they are getting for what amount. For this reason they can find it hard to determine which model is better for their specific needs.

The main two payment business models are ‘fee-for-service’ and ‘no-win no-fee’ payments. Both have merit for consumers.

In this paper, I examine these structures in detail, and look at the potential benefits and disadvantages for consumers.

Criticism of the Credit Rating Repair Industry

Until now, the credit rating repair industry has been dismissed and sometimes criticised by key government and related industry bodies.

Some of the criticism of the credit rating repair industry has come from credit rating repair companies charging for providing a copy of a consumer credit report – a service which is free for consumers under Australian credit reporting legislation.

The Australian Competition and Consumer Commission’s (ACCC) website advises consumers to avoid debt solution companies.[i]

“Be wary of ‘debt solution’ companies that claim they can ‘improve’ your credit report, especially those that charge fees for services that credit reporting agencies provide for free. In most cases, default listings and other information about your credit history cannot be removed from a report unless it is proven to be wrong,” the ACCC advises.

Credit reporting agency, Dun & Bradstreet issued a release to the media on this issue in 2010 ‘Consumers should be wary of misleading credit report offers’.[ii]

It said a general lack of knowledge on Australia’s credit reporting system meant many consumers pay third parties to obtain a copy of their personal credit report on their behalf.

“Consumers certainly shouldn’t be paying a third party for access to something they are entitled to for free,” Dun & Bradstreet CEO Christine Christian said.

The practice of charging consumers for free credit reports tarnishes the industry, and contributes to inferences such as this in the same release:

“Dun & Bradstreet urges consumers to think carefully about these services arguing that not only are the third party fees unnecessary but promises to remove adverse events are often unfulfilled. Instead consumers should contact regulated credit reporting agencies directly to obtain a copy of their report and if they believe it contains any errors they can discuss that with the agency at no charge. If consumers do feel they need third party advice they should seek assistance from an independent financial counsellor or advisor,” Dun & Bradstreet advised.

I propose both payment structures should be required to openly provide a free credit report service, as per credit reporting legislation. However they would need to pass on extra costs credit reporting agencies charge for urgent delivery of credit reports.

There are some credit rating repair companies who do not advertise their fees and charges or their terms and conditions. This may also contribute to confusion and dissatisfaction by outsiders.

I see great merit in having all fees, charges and related terms and conditions published on the credit rating repair company’s website, so that consumers could have a fair means of determining which credit rating repair company is right for them.

 

What is a Fee-for-service Business Payment Model?

‘Fee-for-service’ in the credit rating repair industry, means a fixed amount charged to a client for an agreed level of service. This is charged based on the level of service and or performance.

This means that the fee structure is provided to the client up front, and as the client approaches each stage of service, the fee for that service will be due.

For example, there may be an initial assessment fee and the rest payable in instalments prior to or following the removal of individual credit file listings.

Pros of the Fee-for-service Business Payment Model

The advantages to a fee-for-service model actually arise from the basic act of a consumer making payment to a credit rating repair company based on an intended service prior to engaging in the service.

Upfront fees prior to service allow the credit rating repair company to be clear to the consumer on what service they will be providing, what charges the consumer will be responsible for and when those charges will be due.

The consumer is then making an informed decision on engaging a credit repairer based on knowledge of all the facts.

They are aware upfront what they will be paying for and why – prior to proceeding with each stage of credit rating repair – with no hidden surprises.

Greater transparency of all costs would be fairer to the consumer, and promote a greater understanding from outside the industry as to what credit rating repair involves.

The advantage of a more transparent consumer-credit rating repairer relationship through full disclosure of all fees and charges via the fee-for-service business payment model can be further enhanced by the introduction of a refundable assessment fee.

This refundable assessment fee would allow the credit rating repairer to assess, based on a good compilation of information, the client’s suitability for credit rating repair. This would mean only clients who are highly likely to have success with their credit rating repair would proceed to a stage where they are paying non-refundable costs, and those considered unsuitable for credit rating repair would have their assessment fee refunded.

It would also allow clients to cancel the credit rating repair services at this early stage if they decided they didn’t want to proceed with repairing their credit rating.

This refundable assessment fee suits the credit rating repair industry framework. There are many stages performed by the credit rating repairer in determining suitability for credit rating repair, and the initial review and analysis of a consumer’s credit file and documentation from creditors – although does not guarantee success, allows for a high determination of likely success.

The other option to a refundable assessment fee in a fee-for-service business payment model could include obtaining authorisation for the payment of services, but not actually charging the client any fees until they are determined to be likely to have success with repairing their credit rating.

The other major advantages in upfront payment in a fee-for-service business payment model arise from the greater monetary security provided to the credit rating repairer by the client. This has advantages for both consumer and credit rating repairer.

A monetary commitment gives the credit rating repairer a greater ability to:

1. Perform a lengthy investigation into the suitability of the consumer for credit rating repair, delivering a greater assurance to the client of the likelihood that their file will be repaired based on evidence.

2. Perform the service for its duration in the best interests of the consumer. By the consumer engaging the credit rating repairer with a monetary ‘consideration’ the engagement becomes a binding contract. The credit rating repair company then has a moral, legal and ethical obligation to do the job of credit rating repair to the best of their ability. This would mean exploring all options open to the consumer for that service, regardless of the length of time working on the credit file.

This may contrast with a no-win no-fee payment model, as because no money has changed hands, it could become vague as to the obligation on the part of the credit rating repairer to do any specific work on the consumer’s credit file, for any length of time.

A fee-for-service business payment model with a non-refundable assessment fee effectively brings together the advantages of transparency and increased level of service from the credit rating repairer, with the advantage that after investigation, should the consumer be considered unlikely to ‘win’, they would have their money refunded and would not incur any costs whatsoever.

Cons of the Fee-for-service Business Payment Model

The disadvantage in the fee-for-service business payment model for the credit rating repairer is that some clients would not be able to engage their services because it requires upfront payment. Some consumers may need to borrow money to make the payments, and can’t borrow due to bad credit history. So some people could be excluded.

However it does mean that within the fee-for-service business payment model there would be lower instances of consumers being defaulted due to non-payment of credit repair services because all monies have already been accounted for.

The Fee-for-service Business Payment Model is the Model I Adopted
For MyCRA Credit Rating Repairs

After careful consideration of both models, I decided my credit rating repair company, MyCRA Credit Rating Repairs, should adopt the fee-for-service customer business payment model as the benefits for the business allowed me to pass on more benefits to consumers.

This business model allows upfront payments, due in stages, with the first stage of fees fully refundable should the client not be considered suitable for credit rating repair.

MyCRA Credit Rating Repairs advertise all fees and charges, terms and conditions on the website and prior to engaging consumers in any credit rating repair. This allows for a more open and transparent relationship with customers at all stages.

The fee-for-service business payment model allows MyCRA Credit Rating Repairs to limit the charge to the client on a ‘per negative listing’ basis. This is regardless of the dollar amount of the default or the time invested to remove the default.

In my experience, fee-for-service presents the credit rating repairer with a responsibility to work on the credit file to the enth degree most importantly because the credit rating repairer has been ‘employed’ by the client to work on their credit file. They will continue to do so, regardless of how long it takes or how difficult a process it may turn out to be.

Individual cases can remain open for seemingly indeterminate periods – MyCRA Credit Rating Repairs recently worked on a client’s credit file for 11 months before we were able to remove the default. The case for credit rating repair remained open until MyCRA Credit Rating Repairs found a solution to the client’s problem, and the listing was eventually removed.

Additionally, using fee-for-service allows MyCRA Credit Rating Repairs to re-open cases which we had previously considered closed if new evidence presents itself.

 

What Is A No-win no-fee Business Payment Model?

‘No-win no-fee’ cost agreements are also known as conditional cost agreements. No-win no-fee broadly means that the client only pays credit rating repair costs if their claim is successful.

The definition of a “successful claim” may vary between credit rating repairers. Ideally a best practice scenario should be where a successful claim is defined as a negative listing removed from the client’s credit file.

For example, a credit rating repairer charges no money up front to accept the application. The client will be advised quite early on whether the company is prepared to proceed with the credit rating repair, and payment is requested on completion of negative listing removal.

Other versions of no-win no-fee include no application or assessment fee, but charges incurred once clients proceed past this initial stage. The client can’t disband services without paying these fees.

It also includes business payment models where there are no fees unless the negative listings are removed, but the client incurs administration costs during the process regardless of success.

Cons of the No-win no-fee Business Payment Model

Many of the disadvantages to a no-win no-fee payment model come from the charges and conditions that are not disclosed to the consumer prior to engaging credit rating repair.

Some firms could hide behind their “no-win no-fee” scheme and not disclose or advertise their terms and conditions or other fees and charges not related to the actual service, with consumers incurring ‘hidden costs’ they have no ability to pay for.

This may include extra charges for: obtaining a copy of the credit report; fractured charges based on amounts of negative listings; preparation of documentation and ‘administration’ fees.

For instance, some of our research suggests some companies charge an ‘administration’ charge for opening a file on a client, which is due regardless of the credit rating repairer’s success.

In addition, some companies charge as much as $1800 per listing removal. In these instances what some may consider the overcharging of consumers negates in my opinion, any benefit the client may have received from a no-win no-fee payment model.

The inclusion of ‘hidden’ fees of this type could potentially be misleading to the consumer – particularly if they are charged regardless of the company’s success in repairing the credit rating.

Also, consumers may not be aware that some no-win no-fee credit rating repairers sometimes charge more at the end for delivering that service

These disadvantages to no-win no-fee credit rating repair could be minimised if all fees and charges, terms and conditions were advertised by the company on the website or in other brochures so that informed decisions can be made.

In a nutshell, the no-win no-fee credit rating repairer should make it known to consumers that they may incur some charges separate from the credit rating repair service which would be payable regardless of their success .

The other disadvantages come about due to the lack of monetary commitment from the consumer, which may not bring about the best level of ethics and service from the credit rating repair company.

When considering who may be suitable for credit rating repair, the no-win no-fee business payment model would have to ask:

“Which cases should we take on based on very little knowledge of the client?”

There are ‘cut and dried’ cases where very obvious credit file inconsistencies exist, and in these instances it would be easier to determine success in credit repair with only brief information. But in other cases much more information would be needed to make that determination.

The no-win no-fee credit rating repairer is then faced with a choice of how to handle it. Do they put in more work on the client prior to engaging official services of credit rating repair? Or do they take everyone on board, regardless of their likelihood of success?

In the first instance, credit rating repairers may have to refuse some cases due to the company not having enough documentation to make an accurate assessment of the case – the case could be considered too big a ‘risk’ to take on without more evidence.

Or alternatively, some companies could take on everyone they come across. But this could leave a great volume of consumers with extra fees and charges owing should their credit repair not be successful. In this instance I would consider the term ‘no-win no-fee’ technically untrue.

Likewise, during the course of the agreement, having no money change hands means there can be vagueness as to what obligation the no-win no-fee credit rating repairer is under to give a 100 per cent commitment to the repair case.

By the nature of no money changing hands – the consumer may not be able to force the credit rating repairer under the no-win no-fee business payment model to perform any specific service.  When extra fees are due at the end whether the repair is successful or not – there is a possibility that some credit repair companies could take advantage of the consumer, which would be highly unethical.

Also, there is the issue of what to do in instances that clients do not pay their credit repair bill.

Some no-win no-fee credit rating repairers also do a significant amount of work or all of the work on the credit file, prior to any payment.

Most would have to consider defaulting a client should issues of non- payment arise – inevitably negating the work the company has just done with the client’s credit file.

In contrast, fee-for-service payment models have less need to default clients due to non-payment of credit repair fees and charges, because the bulk of the fees have already been paid prior to engaging service.

Pros of the No-win no-fee Business Payment Model

An advantage to adopting a no-win no-fee business payment model, is the likelihood that more consumers will be able to access the service, due to the advantage of paying after service is completed.

For those consumers who cannot afford credit rating repair and cannot borrow money to pay for credit repair until their negative listings are removed, they can still test the waters on fixing their credit file.

For this reason it can have a place in any industry customer business payment model going forward but only with significant change to regulations to maintain the consumer’s best interests.

The Customer Payment Business Model in the Financial Planning Industry

In March 2004, the financial services industry experienced a transition of compulsory open disclosure of fees and charges by all advisers.

This was in response to criticism of commission-based fee structures as opposed to fee-for-service. Financial planners on commission-based fees were considered to be providing ‘biased’ advice due to getting a payment for promoting a certain product or investment.

In May 2009, the Financial Standard reported the Financial Planning Association (FPA) had recommended to the government that the standard remuneration model for advice be fee-for-service, citing that the “commission-based regime is unsustainable”.[iii]

The FPA submitted a consultation paper to the government outlining a host of policies. FPA chief executive Jo-Anne Bloch said the recommendations were designed to remove the stigma that financial planners are “product floggers” as the new fee regime should provide the public with advice that is free from the influence of product manufacturers.

Their proposed new model would allow consumers to compare the fees they are paying – something that many can’t do at the moment because of the complex combination of commission and direct payments employed by any given financial planning practice.

“If we don’t lead [the debate], the government most certainly will,” Ms Bloch said.

The Government has also responded with significant reforms to the provision of financial advice, as a response to the Inquiry into Financial Products and Services in Australia by the Parliamentary Joint Committee on Corporations and Financial Services. These key reforms will apply from 1 July 2012.[iv]

The Government’s response was guided by two overriding principles:

• financial advice must be in the client’s best interests – distortions to remuneration, which misalign the best interests of the client and the adviser, should be minimised; and

• in minimising these distortions, financial advice should not be put out of reach of those who would benefit from it.

Consumer watchdog, Choice recently wrote an article on ‘Demystifying financial advice ‘(26 September, 2011) on the benefits and challenges of the government’s introduction of these reforms.[v]

Choice believes the government could enhance legislation even further in order to ensure advisers have a bigger duty of care to demonstrate whether a conflict of interest does or doesn’t exist and identify how they will put the client’s interests first when it does.

“The providing entity (that is, the product-maker or fund manager that holds the financial services licence) should have a separate duty to ensure that personal advice provided by authorised representatives is in the client’s best interests and that those interests come before those of the provider,” Choice said.

This type of ‘client best interest’ philosophy should be the model adopted in the credit rating repair industry, regardless of the type of payment business model chosen by the firm. The credit rating repair industry should address what the key concerns for consumers could be, what their rights are, and then go on to ensure there is a framework in place to protect their rights in both advertising and implementing  customer business payment models.

As the FPA insisted when putting forward their own recommendations to the government on fee reform, ‘If we don’t lead the debate, they will’.

The Customer Payment Business Model in the Legal Industry

In the Legal arena, no-win no-fee policy relates most closely with Personal Injury proceedings.  This type of payment method works most effectively with those clients who have no money to pay for ongoing legal costs until they receive compensation for the matter in question.

This has parallels in the credit rating repair industry, because many consumers have no access to cash until their credit file has cleared.

What has been criticised in legal circles, is firms advertising ‘no-win no-fee’ policies, but ‘misleading’ clients by charging clients for other costs associated with the case regardless of the outcome of the case.

The Queensland Law Society’s Ethics Centre addresses the no-win no-fee policy as it relates to Personal Injury proceedings.[vi]

“In the case of Legal Practitioners Complaints Committee and Browne [2006] WASAT 201 the Western Australia State Administrative Tribunal found that the words “no compensation = no legal fees” was misleading and amounted to unprofessional conduct, as a member of the public may think they have no liability for any fees or costs, rather than just those of their solicitors. The Committee in this case also complained that the advertisement did not disclose that a client may have a liability to the law practice for fees and disbursements in the event that the law practice ceased to act for the client, although the Tribunal did not make a finding in relation to that.”

The Qld Law Society advises consumers on what their rights and obligations are in these personal injury cases:

“If you are unsuccessful in your claim for compensation then you do not need to pay your lawyers legal costs. You may be required to pay your lawyers disbursements that is, the cost of things such as interpreter’s fees, court fees, medical reports, expert fees and the like. This will depend on your agreement with your lawyer.

If you are unsuccessful in your claim you may also be required to pay the legal costs of the defendant. There is always the risk that if you are unsuccessful you will need to pay the other side legal costs but not your own,” it says.

In the credit rating repair industry, as with the legal industry there must be some open debate in view to defining regulations on no-win no-fee business payment model advertising.

The likelihood that consumers who are prompted to choose a no-win no-fee credit rating repairer because they are already struggling financially could be misled by false, vague or unclear advertising of cost and or terms and conditions is a scenario the credit rating repair industry should not wish to promote.

Recommendations for a Streamlined Customer Payment Business Model in the Credit Repair Industry

Both no-win no-fee and fee-for-service customer payment business models have merit in the credit rating repair industry, so long as:

a. the consumer is protected; and

b. there is full disclosure of all fees and charges, and terms and conditions prior to proceeding.

The type of fee structure adopted by credit repair companies will depend on the company’s individual business model.

A fee-for-service payment models should be required to include the following points:

  • Full disclosure of terms and conditions;
  • Full disclosure of when payments will be due;
  • A fully refundable assessment fee with comprehensive success assessment; and
  • Free copy of credit file to consumer.

Likewise, a no-win no-fee payment business payment model should be required to include:

  • Full disclosure of terms and conditions;
  • Full determination and disclosure of the company’s definition of a ‘win’ in credit rating repair;
  • Full disclosure of when all payment will be due;
  • Full disclosure of all fees and charges prior to credit repair agreement; and
  • Free copy of credit file to consumer.

Summary

The biggest criticism of the credit rating repair industry is that professional credit rating repairers are seen to be charging fees for what consumers can technically do for themselves.

In reality, credit reporting can be a minefield for the individual to navigate. A good professional credit rating repairer can do much more for a consumer, and has a much greater chance of success, through knowledge of legislation and relationships with and ability to negotiate with creditors.

The fee-for-service business payment model has great merit for its transparency, providing clear instruction to the consumer of what service they will receive, and what they are paying for. It also allows the credit rating repairer to deliver a better service. But it restricts access to those who can’t afford it.

The no-win no-fee business payment model often has extra fees and charges – whether disclosed or otherwise, which make the term ‘no-win no-fee’ misleading. It also potentially minimises the level of service by the credit repairer due to the lack of commitment from the consumer. But it does have the advantage for consumers who don’t have access to money upfront for credit rating repair.

Therefore going forward, both models should be included in any type of regulated fee structure or recommendation for the credit repair industry.

What the industry must do across both models, is ensure that whatever business payment model a credit repair company adopts that all changes are in the ‘best interests’ of the consumer as has been the impetus from the financial planning industry.

Also, as in the legal arena – through its promotion and advertising, the credit rating repair industry should ensure consumers are offered a fair and easy means of product, cost and likely success comparison.

This greater transparency will allow the industry to focus on the real issues within credit reporting which have previously been hidden under a cloud of hearsay and confusion from outsiders.

It can be said, that the footsteps the credit rating repair industry leaves during this time will allow credit rating repairers to march forward, revolutionising credit reporting itself in Australasia.

More about the Author

Graham Doessel is the founder and CEO of Australasia’s leading credit rating repair specialist, MyCRA Credit Rating Repairs – now in its fourth year of operation.

Graham and MyCRA Credit Rating Repairs are proud to be a part of developing a self-regulating framework for the credit rating repair industry through the lead role in the formation of the Credit Repair Industry Association of Australasia (www.CRIAA.org.au).

These efforts in driving the formation of the CRIAA are motivated solely by the need for an industry body which can act as a catalyst to promote change in the credit repair industry and bring about a set of standards and a code of conduct for members, which will revolutionise the credit rating repair industry in Australia and New Zealand.

MyCRA Credit Rating Repairs is nominated for the 2012 Telstra Small Business Awards and the 2012 Start-Up Smart Awards.

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