Shoring up your shabby credit score could be as easy as turning to eBay
Sensing opportunity amid the distressed housing market, some companies are now offering borrowers quick ways to mend their credit scores. The companies promise to vastly lower loan costs by letting borrowers piggyback on the good credit of others. The cost for such services starts in the hundreds of dollars and can reach into the thousands.
Credit scores are vitally important numbers, helping determine whether people qualify for loans, and if so, how high their interest rates will be. A good credit score can mean big savings -- so it's tempting for borrowers in need of refinancing to look into this option.
On eBay, consumers can find credit-repair companies like Platinum Marketing. Or cash-strapped borrowers could talk with companies like San Diego-based TradeLine Solutions, Clearwater, Fla.-based Instant Credit Builders and Little Rock-based Seasoned Trade Lines, which also offer ways to prop up credit scores.
The new players aim to fill a niche with innovative -- but legally questionable -- techniques such as promising to repair a score within days, which can vastly lower the cost of borrowing money. In some cases the tactics could make borrowing a possibility where it wasn't before.
A big reason for the surge in firms offering help with credit scores is the wide range of mortgages made to customers with shaky borrowing histories, so-called subprime loans. Many experts say some of those loans should never have been approved in the first place. Mortgage payments that started with lower teaser interest rates, or even interest-only payments, are now beginning to reset, sending housing payments skyward. That increases the risk of foreclosure and may make people more likely to grasp at straws as they search for ways to keep their homes.
The people behind the credit-boosting methods certainly cite noble goals as their motivation.
"We are helping them keep their house," says TradeLine Solutions' CEO Ted Stearns; Platinum Marketing's Mike Anderson, who also brokers home loans, says, "My motivation is to help them out and get them their mortgage."
Instant Credit Builders and Seasoned Trade Lines didn't respond to requests for comments.
Stearns adds that many borrowers who got tricked into mortgages they didn't understand now face payment increases of up to 50% and often can't refinance. The borrowers having trouble "are people who a few years ago would never have defaulted."
It isn't just risky mortgages that have created demand for these services, either. Many people believe the consumer credit-rating agencies, such as Equifax (EFX) , Experian and TransUnion, have a lot of out-of-date, inaccurate information on credit reports that has the potential to lower a given borrower's credit score unfairly.
The agencies deny that charge.
"It has always been our objective to accurately reflect a consumer's credit health," says David Rubinger, a spokesman for Equifax in Atlanta. TransUnion expressed similar sentiments, while Experian representatives could not be reached for comment.
The process of boosting credit scores is called "piggybacking," and TradeLine uses two different varieties of it, Stearns says.
One method is to add a consumer to someone else's account as an authorized user. Authorized users are normally spouses, children or business partners, but would-be borrowers can be added to a stranger's account via TradeLine, for a fee.
(The people who provide their credit accounts for such uses get paid a fee ($100-$200) by the firms for each authorization, but don't dole out the account details to the new "name," thus reducing the risk of unwanted charges.)
Stearns charges $450 and up per line of credit, which could add up to 35 points to a credit score. That's in line with prices recently listed on eBay. So, to raise a score from a poor 550 to a respectable 700 might cost about $2,250. Platinum's Anderson says he charges a fixed amount of $3,750, but the fee includes extensive cleanup of incorrect items as well as use of piggybacking.
Those prices may seem steep, but the benefits of an improved credit score can be much larger. Just one percentage point clipped off the cost of a modest $250,000 home loan would yield savings in excess of $43,000 over the life of a 30-year mortgage.
However, the credit-scoring industry is aware of the practice, so it might not be very useful in the end. TransUnion says it doesn't include authorized users in the calculation of scores. And new rating methodologies due to be implemented next year could eliminate their efficacy at the other major firms.
The other method TradeLine uses may be more controversial, but likely longer-lived. Stearns says it involves new users taking on a loan which has already been paid off in its entirety: "Seasoned primary accounts," he calls them. He charges $999 per account, which he claims should lift credit scores by 40 to 45 points within a five-day period.
Typically, Stearns says, he buys extinguished loans from banks and lets his customers "assume" the zero-balance blemish-free "debts." The previous borrower is unaffected.
Whether or not the techniques are legal -- Stearns says they are, and the Federal Trade Commission declined to comment on TradeLine's practices -- they smell funny to many people.
"We would have concerns that it might encourage possible consumer fraud," says Allen Fishbein, director of housing and credit policy at the Washington, D.C.-based Consumer Federation of America. "It appears that it could be used by consumers in a way that would not be appropriate."
Neither Equifax nor TransUnion were impressed by the TradeLine tactic, either. TransUnion suggests unhappy consumers review their credit files regularly as well as pay bills on time.
Piggybacking could also spell big trouble for some consumers: If such an "enhanced" credit score were to be used to borrow money, it could constitute loan fraud. And that would be the last thing a beleaguered homeowner would need.
The techniques also pose a potential threat to the integrity of the secondary loan market. The true credit rating of a borrower is important information for investors, so they can figure out the appropriate price to bid for the debt.
But if the credit scores are higher than they should be, investors could pay too much for the debt they purchase and themselves be assuming more risk than they wanted. That should trigger some concern, not least because lack of transparency about loan portfolios has been a major contributor to the credit-market problems of the past several months.
In this case, especially with the recent market volatility and the recent turmoil in the credit markets, even just a couple of reports of above-the-norm defaults could spook investors, and might freeze up credit to the wider consumer borrower category. A look at the recent share price charts of financial giants Merrill Lynch (MER) , Citigroup (C) and Bear Stearns (BSC) shows how badly the credit crunch has affected banks already.
Consumers who take up these offers do so at their own peril. But, with the prospect of many people losing their homes, it's unlikely these practices will go away anytime soon.
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