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A FICO score manipulation scheme

Question: Below is a FICO score manipulation scheme to help some debtors avoid bankruptcy. Similar schemes could be used for other credit purposes, such as getting better mortgage deals, etc., but this particular discussion focuses on helping some debtors avoid bankruptcy.

There will probably be at least two different types of reply to this. First, there will be those who say what they think of this scheme, provide alternate schemes, etc. Second, there will be those replies posted by idiots who say the debtors should not have so much debt in the first place. As if anyone didn’t already know that. Please completely ignore those replies of the second type. There is no point in trying to educate an idiot.

Here is what tends to happen in some cases leading to bankruptcy: The person has a temporary financial crisis and makes use of some of those “%0 for 9 months” credit card offers, to solve the immediate crisis. But their income is not enough to pay off the debt for a number of years, and the interest rates go way up. They use other such offers, to do balance transfers from the high rate cards. But all the interest rates keep going up. The more debt they have, the higher their interest rates. Maybe they have another financial crisis which makes things much worse, and end up with way more debt than they can pay off in many years. The more debt they have, the higher their interest rates go, and the fewer 0% offers they get. Eventually it gets to the point where they’re paying most of their income in monthly payments but their debt keeps growing from interest alone.

In some cases they might be paying interest rates in excess of 30 or 40%. In some such cases, if they could reduce their interest rate to 10%, they could eventually recover instead of heading for bankruptcy.

The one thing that would let them reduce their interest rate to 10% would be a much higher FICO score. Even if they always paid all their bills on time, their FICO score can be very low just from having too much debt.

The way this scheme would work, its immediate goal would be to give the person a much higher FICO score. The company that provides this scheme would make a deal with the debtor, that the debtor would give them power of attorney and use their address for receipt of all monthly statements, and give them all the debtor’s credit cards. The company would pay off the debtor’s debts in full, and the debtor would owe that money to them. But the key to making this scheme work is that the company would not report this new debt on the debtor’s credit file.

The debtor would agree not to take on any more debt except as instructed by this company. The FICO score would go way up, because the credit file would show all debts paid in full. Then, working with this company, the debtor would selectively apply for new credit as instructed by them, and that new credit would be used to pay off the debtor’s debt to this company.

At that point, the debtor would be back to having big debts on their credit file, but at much lower interest rates, making it possible to dig out. The experience of being almost bankrupt would help that debtor learn to be more careful, and give them a chance to actually succeed at digging out. The company that provided this scheme would be off the hook, because they would be paid in full at this point. They would have earned interest and fees, and would have helped give the debtor a new start.

Again, the key to this scheme is that the company would not report the temporary debt on the credit file. That would artificially inflate the FICO score to help the debtor dig out.

That sounds sleazy, but it isn’t. There is no law requiring a creditor to report a debt to a credit reporting agency. They would just be taking advantage of a loophole in what is already a sleazy but unavoidable credit reporting system. They would be scamming the scammers, but their scams would be legal and far more ethical than the scams of big banks and credit reporting agencies.

The main reason why such a scheme would work is that in the type of situation described above where the debtor is headed towards bankruptcy, the 30 or 40% interest consumes the bulk of that debtor’s monthly income. By reducing it to 10%, the scheme would free up the bulk of the income to be used for paying off the debts.

Answer: If you could somehow enforce this, then it seems viable. You’re essentially refinancing the person’s credit card debt at a lower rate, but where you still are making a profit.

I think that maybe you’d need to pay the person’s credit card debt off gradually, but at a much higher rate than the minimum payment, until he or she proves that they are responsible. Once the FICO store starts rising, the person will be tempted to take on more debt.

The person that gets into this mess probably has no collateral, or they’d take out a home equity loan at prime-1/2% to pay off their credit card debt.

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