About Alternative Credit Files

A good credit score is an asset when applying for credit because it guarantees the best interest rate possible. If you have made debt management mistakes in the past, you may be searching for a way to clean your credit report up as quickly as possible to get a fresh start. Alternate credit files, although touted as legal by many credit repair organizations, are nevertheless prohibited by the Federal Trade Commission and may carry serious consequences.

The Facts

An alternate credit file is any credit report that exists in your name other than your standard credit reports. Some credit repair organizations will advertise alternate credit files as an easy way for consumers to wipe clean a long history of adverse credit. This practice is called "file segregation." Do not believe any false promises about new credit histories. The only way to create a positive credit history is to demonstrate responsible debt management skills over time.

Process

Initial credit is established when you apply and are accepted for a loan or line of credit using your Social Security number (SSN). Your personal information and payment history are updated to your credit file by your creditors. In order to create an alternate credit file, unscrupulous credit repair organizations will advise you to apply for credit using an employer identification number (EIN) assigned by the IRS. Like an SSN, an EIN is nine digits long. Because of this, it is taken by creditors to be an SSN. When a creditor is unable to find your identification in the credit system due to not being given accurate information, a new credit file will be opened in your name when credit is granted.

Function

The purpose of file segregation is to provide small business owners with a method of keeping their personal and business credit separate. Alternate credit files were never intended to be used by individuals as a method of credit repair. The Federal Trade Commission formally states that alternate credit files for individuals are a violation of the Truth in Lending Act (TILA). (See References 1) Participating in file segregation is not in itself illegal, but violating the TILA is. In this way the FTC is able to prosecute companies offering the service.

History

The idea of using small business credit regulations to create new credit reports for individuals first appeared in the mid-1990s. Use of alternate credit files became such a rampant problem for the lending industry that the FTC launched a formal investigation titled "Operation New ID-Bad Idea." Ultimately, more than 50 credit repair companies were charged with violations of the TILA. (See References 2)

Consequences

Lying on a mortgage application is considered fraud and can potentially come with jail time. (See References 3) If you put another number in the space on a mortgage application that asks for your SSN, you are committing fraud.

The consequences of alternate credit files go beyond just mortgages. An often unforeseen consequence is that once enough time has passed for derogatory items to be removed from your original credit report, you may find it challenging to switch back. A percentage of your credit score comes from the length of your credit history. If left unattended for long enough, your legitimate credit history may contain no history at all. This will force you to start over.

Any good credit that was built up on the alternate file must be left there unless you are willing to openly admit to committing fraud. Although individuals are not actively prosecuted for file segregation, new laws regulating the credit industry and credit practices are passed frequently. If and when a law is passed concerning alternate credit files for individuals, it may just carry with it a prison term.