Consultant: Some Credit Repair Shops Can Damage Loan Prospects

Lenders often try to help borrowers clean up their credit issues to boost their all-important credit scores.

But they could be doing their clients a grave disservice if they send them to so-called credit repair specialists.

Such agencies can sometimes get derogatory information removed from someone's credit record. But the black marks almost invariably return to the file within 30 days or so, and that can trip up a borrower who is about to close on a mortgage.

Credit repair firms are successful in getting late payments, bankruptcies and other disputed items removed from files because they flood credit bureaus with dispute letters on behalf of borrowers. Under the law, the credit bureau must respond to inquiries within 30 days or remove the disputed items from their records.

But these companies, which have been labeled as scam artists by the Federal Trade Commission and others, don't deal with creditors at all. So when it is time for the credit repair company to report late payers to the credit bureaus, the disputed item once again becomes part of the borrower's file.

"Credit repair companies charge people a ton of money. But if they don't take the consumer's beef to his creditor, it's a waste because the item pops back up on the credit report, usually just about the time when the borrower is ready to close," says Eileen O'Neill of Gold Key Credit Consulting, Milford, Conn.

Speaking at the New England Mortgage Bankers Conference here late last month, Ms. O'Neill said consumers are far better off working with firms like hers because they deal with both the credit bureau and the creditor.

Gold Key, a 10-year-old firm with offices in New York and New Jersey as well as Connecticut, works with mortgage brokers and bankers to help borrowers improve their credit scores, which are now the holy grail of underwriting. If someone's score is high enough, it hardly matters any more what the credit report contains.

However, when a borrower needs a higher number, Gold Key will review his credit report at no charge and make recommendations.

Sometimes, though, even a legitimate company like Gold Key can't help. "If you are a constant and compulsive offender," Ms. O'Neill told the meeting, "there's nothing we can do for you."

But if possible, the company will work with creditors and collection agencies to help borrowers get their credit ratings restored and their credit scores increased. "Gold Key gets you healthy and keeps you that way," the company sales consultant said.

The company's services aren't cheap. Though the initial review is free, there's a $250 processing fee if the borrower decides to move ahead plus a per-item charge that averages around $100.

The typical Gold Key client ends up paying about $1,000, Ms. O'Neill said. But for that, the company is often able to get credit scores up by more than 100 points.

The company works closely with more than 400 creditors who are often willing to waive late fees or sometimes even part of what is owed them because they know that when Gold Key is involved, they are more likely to be paid. And the company keeps constant tabs on its clients' credit reports to make sure derogatories are deleted and stay that way.

Toward that end, Ms. O'Neill advised the conference to make sure creditors report that tardy accounts have been paid and should be removed.

"Updated as paid is not enough," she said. "When an item is paid but not removed, the software looks at it like an admission of guilt, and your overall score will go down for about four months."

If for some reason a paid account is not going to be removed from the borrower's record, Ms. O'Neill suggested that brokers tell their clients to pay the creditor directly rather than the collection agency and obtain a letter from the creditor that says the account has been paid in full.

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