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Hack Your Credit Score?

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When I was at Prosper's annual conference, CEO Chris Larsen flashed through an interesting slide. It showed a borrow with a grade D credit score having gotten a loan at 1% interest. This is far from the norm. Often someone with a credit score will end with an interest rate over 20%. When we looked deeper into this loan, there was only one lender for the full amount.

I suspect that the lender was a friend or family member. If so, this seems like an interesting way to ensure that debts are paid back. It might seem a little cold to have a third-party police an agreement between friends. However, when I consider the disagreements than can occur when borrowing and lending money, it seems like a good idea.

creditscore.gifSo here's the part where you might be able to hack a good almost free credit score for yourself. You need to have some spare cash, maybe a thousand dollars and/or a very good friend. Here's my plan. You sign up as a borrower on Prosper and request a loan for the lowest rate possible - 1% or even lower if the system allows it. At the same time, you write a trusted friend a check for the amount of money your request. This friend agrees to bid on, and fund your loan. You use the money loaned to you to pay the loan. All this time, Prosper reports to the credit bureaus your payments are on time, you can also pull out a free credit report score to double check how your plan's doing. You can pay your debt off whenever you like - so in a worst case scenario, you could simply pay off the loans and end the "experiment."

This plan isn't without it's caveats. First, you'll have to pay Prosper's borrowers' fees, which can range from 1-3%. I would keep the money in a high-interest savings account. If you did this, you would end up breaking even or making money on Prosper's fees. Just to be safe, I'd still be cautious and look to do a small transaction - perhaps just borrow one thousand dollars. Since I don't run a credit bureau, I can't say how much this may help your credit score.

I want to re-emphasize what I wrote in the last paragraph. I have no evidence that this will work, but it seems plausible. As with anything, explore and research the idea to determine if it's right for you.

Image Credit: The Weslyn Group

Last updated on March 9, 2015.

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15 Responses to “Hack Your Credit Score?”

  1. mh1 says:

    I was under the impression that Prosper didn’t report payments to your credit report but rather, only affected your credit score on the hard pull the do for the borrower at the event of a successful loan received.

  2. Laura says:

    Any interest rate charged below the applicable federal rate AFR would be considered a gift–which could be an issue if it was a big enough loan (i.e. 12K per year tax free limit on gifts). Also the lender needs to report the interest on the tax return.

    kind of a pain perhaps…

  3. Lazy Man says:

    MH1 – from Prosper’s FAQ:
    “Can Prosper help borrowers build credit? Will delinquency be reported?

    Yes. Because Prosper reports all payment activity to credit reporting agencies, using Prosper is an excellent way for new borrowers to establish or rebuild their credit score. In addition, delinquencies are also reported to credit reporting agencies, so bad performance will affect a borrower’s credit score negatively.”

    Laura – I’m not a tax person, but I didn’t find that the definition of a gift to be a cash amount under the AFR. If so, a 10K or 12K limit should be more that enough to build credit – I would suggest working with a lower amount. The lender does have to report his earnings on his tax – but it’s not much different than having an ING account.

  4. Jesse says:

    it seems an easier way if you have no credit would be to get a credit card with a very high interest rate and low maximum and just make purchases on it, then immediately pay it off – then you don’t have to pay the prosper fees etc.

  5. Joseph Sangl says:

    Nice idea IF the friends things works. I have met many people who have ruined relationships over loans. The cool thing here is that the friend never had to give you their money. It is your money. The only issue I see here is that the friend would not give each of the monthly payments back.

  6. Patrick says:

    I thought about lending a family member money through Prosper at a discounted rate – that way there would be a legally binding agreement in place. The rate would be very reasonable (probably about what I could get from a bank account), but much lower than the 20% they currently pay.

    Neither of us are sure if this will happen though because their debt reduction plan is based on 4 years or payments and Prosper loans are 3 years.

    Interesting article and idea.

  7. No Debt Plan says:

    I wonder if this is a new way for companies to pop up to “guarantee” to increase your credit score like they did with credit cards. In the past, you took someone with a high credit score and added an authorized user to it with a low credit score. That person’s score would then increase.

    Could this be similar? Pay someone a fee off-Prosper, do a 1% prosper loan, and the score goes up?

  8. Interesting idea. Virgin Money might also be a good idea in this case. VM has a small flat fee on just one side of the transaction if I remember correctly. Although, VM does not pay out the referral fees which would help cover some of the prosper.com transaction costs.

  9. Tom says:

    Like PLP mentioned, this is the business plan behind Virgin Money. They help facilitate loans between family members like this.

    Another thing to consider – this might temporarily hurt your credit score before it helps because you have more outstanding debt.

  10. Frugal Dad says:

    Interesting concept! I wonder if this is the “credit repair” of the future. Firms will likely pop up to “loan” you money (which you really pay up front) and then have you repay over time to boost your FICO. I would imagine something like this would only work if your score is already bad, but not it you were a 720+ to begin with.

  11. summerleo says:

    I currently have a loan with Prosper and they do report to the credit bureaus because when I applied for another car loan they showed up when the dealership pulled my credit reports.

    I know that when I originally received my loan Prosper’s collections department was going through a major change and I know they were in the process of updating a lot of their policies especially the collections of defaulted loans.

    It’s a good site for people like myself who has trouble getting a loan previously with a low credit score. But since I’ve had the Prosper loan payments taken automatically out of my checking account my credit score has gone up every month.

  12. Mike Hardin says:

    I like prosper but….

    If you want to loan yourself money to build a credit history, why not just use a secured credit card and pay 0 interest. Go to your bank and apply for a secured credit card. Only ask for enough credit to cover what you spend on gasoline every month. You’ll have to put that much in a savings account to cover the card. Use online banking or your your credit cards website to schedule automatic full statement balance payments from the savings account each month. When you get paid at the first of the month you need to put in more money to cover next months gas.

    This was you are basically using the credit card like a debit card, never charging more than you have in the account that secures it. You are paying no interest because you pay off the statement balance each month. Yet you always have a balance because you will certainly charge some gasoline (or groceries, or whatever other recurring monthly expense you want to use it for)in between the statement closing date and the payment due date.

    This allows you to develop a history of having a credit line open and making payments as agreed. Never ever pay less than the full statement balance though, as interest rates on secured cards tend to be high.

  13. Lazy Man says:

    Awesome question… it’s fitting enough for a whole post on it’s own… expect one very soon.

  14. Angie says:

    I recently have had some credit problems. I liked my credit cards waaay too much. I think the best thing you can do to recover is to allow yourself enough time to straighten everything all out. Nothing happens overnight, especially fixing a credit score.

  15. Gregory Despain says:

    Hands down, Apple’s app store wins by a mile. It’s a huge selection of all sorts of apps vs a rather sad selection of a handful for Zune. Microsoft has plans, especially in the realm of games, but I’m not sure I’d want to bet on the future if this aspect is important to you. The iPod is a much better choice in that case.

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