Sometimes, credit problems can seem insurmountable. While the average consumer hopes to increase their credit score so they can shave a few percentage points off their mortgage rate or get a low interest credit card, there are many consumers whose credit rating essentially excludes them from the credit game entirely. They are being denied loans at any interest rate and the dream of owning their own home is nothing more than that; a dream.
It is people in this category that have lost hope and begin to look to illegitimate methods of credit repair. They start looking into credit repair clinics who promise a way to completely start over. Clinics who claim to be able to create a brand new credit identity and a brand new credit report – clinics that seem to have the perfect solution to a hopeless situation.
Most people realize that when something sounds too good to be true, it usually is. Even the people who fall for these credit repair scams probably know the clinics that provide these services are not to be trusted. But when faced with the prospect of having a repossession, foreclosure, or bankruptcy on their credit reports for years to come, they become desperate enough to do things against their better judgment.
Creating a new credit identity for use on a credit application is known as file segregation. It is done by creating a new Employer Identification Number (EIN) which is designed to be used by businesses to report financial information to the IRS and the Social Security Administration. When used for file segregation, the EIN acts as a “new” personal Social Security number that people then use on credit applications in place of their true Social Security number, which is linked to their true credit reports.
The first thing to remember about file segregation is that it is illegal and it is not just the credit repair clinic that is breaking the law. It is also illegal for you to obtain an EIN under false pretenses, to misrepresent your Social Security number, and to make any false statements on a credit application. Not only can the clinic providing file segregation services get in trouble, but by participating in the scheme you could also be charged with federal crimes including mail and wire fraud.
Another thing to remember is that your credit score is based on your credit history. With a new credit file, you have no credit history. Especially with the more stringent lending guidelines of today, lenders need to see evidence that you have been responsible with credit in the past. Having a new credit report likely will not get you any closer to owning a home than a damaged credit report.
No matter how desperate things may seem, file segregation is never an answer. No matter how hopeless a situation may seem, there are options. They will not be easy fixes and obtaining a good credit score will not be an overnight occurrence, but through a concerted effort, even the worst credit score can be raised.