Time — and only time — heals all the wounds inflicted on a consumer's credit report by unpaid debt. And we're not talking a short time. Credit bureaus can list negative information for seven years. Bankruptcy information shows up for as long as 10 years.

Unfortunately, there is an abundance of enterprising scam artists eager to prey on desperate consumers by convincing them otherwise; that — for a fee, of course — promise they can wipe your slate clean faster than you can say, "Charge it."

Over the past three years, the number of personal bankruptcies has fallen slightly, with 1.57 million people declaring bankruptcy in 2004, according to the American Bankruptcy Institute. But consumer debt is higher than ever before, and with more credit-card companies uping the APRs of debtors who have a poor credit rating, it's easy to see why many might be tempted by promises to make their credit well again. Especially if they're facing embarrassing calls from creditors or in dire need of a mortgage loan or money for some important purpose, like medical care.

But don't be fooled. Catherine Williams, president of the Consumer Credit Counseling Service of Greater Chicago, likens bad credit to wrinkles, and credit-repair organizations to those wrinkle removers you see advertised in slick magazines. "It can't make the wrinkles go away," she says. "These are bad, bad people," she says of agencies that promise to erase the damage. "The only way to heal your credit is with new, regular, ontime payments — and by paying off the old debt," she says.

In 1997, Congress passed the Credit Repair Organizations (CRO) Act to limit the claims such organizations can make. The Federal Trade Commission and the Department of Justice make periodic sweeps to crack down on fraudulent practices. But, these days, credit-repair schemes are proliferating on the Internet and attracting customers through email marketing. Some businesses do operate within the guidelines of the CRO Act. But for $100 to $1,000, these flimflam artists only do what you could with a letter and a 37-cent stamp.

File Segregation — the Latest Scam
Perhaps the most egregious scam is a relatively new one: file segregation. Unfortunately, consumers who fall for this might wind up with more than continuing bad credit. They could win a criminal record as well.

Here's how it works: The credit-repair agency tells you how to get an employee-identification number (the nine-digit substitute for a Social Security number sometimes assigned to household help, like live-in nannies) from the IRS. The debtor then uses this number to apply for new credit, substituting a different address and phone number — one of a friend, perhaps. This makes it difficult for creditors to link your latest identity to your previous credit history. Then, consumers are told to build up good credit by getting a new bank or retail credit card and paying it off quickly.

These services advertise their methods as "completely legal" — which should set off alarm bells right there. "In essence, you're creating a false identity," says Brenda Mack, an FTC spokeswoman. "Not only are they scamming you, they're telling you to do something that's criminal." It's a felony to establish a new identity for such a purpose, she says.

Dr. Solomon Bradford, a blind minister in Columbia, S.C., and his wife were two of those snared. The couple had been having trouble getting a new mortgage because they had a history of late payments. A woman who worked with Mrs. Bradford convinced them to try creating a new credit identity.

The Bradfords found out there was a problem with this after a bank employee noticed they had two different identification numbers on their account. Fortunately, the couple was not prosecuted. The FTC was more interested in tracking down the credit repair agency they had worked with. But you might not be so lucky.

First, Correct Errors
How can you legitimately repair your credit report? First, correct any errors. The Fair Credit Reporting Act entitles consumers to dispute information on their credit report when they think it's wrong. If you've recently been denied credit, the creditor that turned you down must give you the name, address and phone number of the credit bureaus it used. You then have a right to a free copy of that report. Thanks to the FACT Act of 2004, consumers can also receive one free credit report a year from each of the three major credit-reporting bureaus, Equifax, Experian and Trans Union, based on where they live. Eligibility rolls out gradually thoughout 2005, with all states becoming eligible by September 1, 2005. (For more on this, go to the program's official Web site, AnnualCreditReport.com. You can also order a copy of your credit report directly from the credit bureaus at any time for about $10.

Trans Union spokeswoman Christine Hill says that when consumers receive their credit report, they also get an toll-free number to call if they would like to dispute any of the information. They can tell the bureau's operator which items they question and Trans Union will investigate. While that investigation is underway, consumers can add a statement to the report giving their side of the story. If the investigation is not complete within 30 days, Trans Union will remove the disputed item until it is finished. If Trans Union's research indeed finds an error, it will send a copy of the corrected credit report to anyone who requested one in the previous six months.

Paying for What You Can Do for Free
If, however, the negative information is accurate, there's nothing a consumer — or credit-repair company — can do to change it. That's when people get into trouble — by heeding agencies' claims that they have the power to remove negative information.

Legitimate credit-repair organizations simply charge you money to review your report and help you get any errors corrected. "We know how to format a dispute and go through a report quickly. Basically, a consumer can't even read a credit report, so we send them an evaluation," says Melony Lawrence, president of Credit Clean, which charges between $200 and $1,000 for its services.

Consumers come to Credit Clean, Lawrence asserts, for the same reason taxpayers go to H&R Block — convenience, not false promises about making everything good again. "I'm not a magician," she says.

Credit monitoring is another service marketed to help those concerned about bad credit. Identity Guard, for example, will monitor your credit report quarterly for $141.86 a year and alert you of problems.

While a monitoring service might help you find out more quickly if you've become a victim of identity theft (when people use your credit history to get their own credit), $140 is a steep price to pay. Especially when $30 can buy a credit report from each of the three major services.

So before you shell out money you really don't have, try to clean up your report on your own. "There's nothing that a credit-repair company can do for you — for a fee — that you cannot do for yourself for little or no cost," says the FTC in its Credit and Consumer Rights statement.

If you do decide to sign on with a service, be sure you know your rights under the CRO Act, which is summarized on the FTC Web site. It states that you do not have to pay until the promised services have been performed.

Finally, remember that the surest way to fixing your credit is by paying off your bills on time. If you need help, there are nonprofit agencies that can assist you in negotiating with creditors and creating a budget that works for you. To find out how to get it touch with them, see our article, "Help! I'm Drowning in Debt."