Posted by Chuck on December 28, 2017
Credit Repair

Published on December 28th, 2017 | by Chuck

162

Strengthen your Credit with an Installment Loan using the Secured Loan Technique

Update: Originally post on August 4th, 2016. Reposting because according to this post on myFICO Alliant will be discontinuing their Share Secure loans on January 2nd, 2018. Currently (5/27/18), the best options to do this trick is with an Alliant unsecured loan (which is the same as the method outlined in this post, except that it will result in a hard pull) or the Navy Federal CU shared secure loan (if you are eligible for that credit union).

There’s a neat trick to get an installment loan which can strengthen your credit report, without any hard pull or cost by applying for a secured loan. We’ll call it the Savings Secure Loan Technique, or SSLT.

Background

Numerous factors affect your credit rating and credit score, most importantly your payment history and credit utilization. That is, if you’ve historically paid your bills on time, and how much of your available credit you utilize (less is better). Under the FICO score algorithm, for example, those two factors make up a whopping 65% of your credit score, 35% and 30% respectively.

The other, more minor factors that affect your credit are:

  • Length of Credit History – the longer the better. This makes up 15% of your FICO score.
  • New Credit – lots of new accounts isn’t good. This makes up 10% of your FICO score.
  • Credit Mix – having varying types of credit helps. This makes up 10% of your FICO score.

This post will deal primarily with the Credit Mix factor, along with some impact on Utilization.

We’ll outline how someone can easily add an installment loan to their credit file without incurring any hard pull or costs. The information is based off this myFico thread; thanks goes to 

Credit Mix

Someone paying many credit cards on time isn’t as reliable to a bank as someone who has dealt properly with different types of loans.

Most of us have many credit cards, and these all fall under the category of revolving loans. The other main type of loan found on your credit report is installment loans, often a mortgage, car loan, or student loan.

To help your credit score, you can easily apply for an ordinary loan such as a car loan, immediately pay it off most of the way, then slowly pay off the remaining balance over time. You won’t incur much cost since you’re only paying interest on the small balance.

The problem with this method is twofold. First, you’ll  sustain a hard pull when applying for the loan; they may even pull more than one credit bureau. Second, loans aren’t always easy to get approved for, especially for someone without strong credit or someone whose income is low.

Enter: Secured Loan Trick

Many banks offer the option to apply for a Savings Secure Loan where you have the full amount of money on deposit with the bank in a savings account so that if you default on the loan they won’t lose out.

In fact, mortgages and car loans are types of secure loans. The Savings Secure Loan is a stronger kind of secured loan, backed by money held in a savings account with the issuing bank. The money in the savings account is frozen until the loan is paid back, leaving no risk for the bank. As the loan is slowly paid up, the money is slowly unfrozen and can be used.

When applying for a SSL, some banks or credit unions won’t do any hard pull since the money is 100% guaranteed by the savings account. Also, it’s easy to get approved for such a loan since there’s no risk to the bank. The main reason this type of loan exists is to help people build credit.

How-To

The trick is to find a bank who doesn’t do a hard pull when opening an account and taking out a secured loan. The most common option is Alliant Credit Union since they’re known not to hard pull for joining the credit union and applying for checking or savings accounts.

Even when applying for a Secure Loan many myFico members confirm that Alliant doesn’t hard pull, despite the typical terminology you’ll see during the loan process indicating that your credit will be reviewed. There might be other banks or credit unions that work as well.

Let’s use Alliant as our example since it’s been tried and tested.

To maximize the benefit of this technique, we want a small loan for a long period of time. With Alliant, we’ll choose a $500 loan for a 60-month loan period.

  • First, become a member. Alliant Credit Union is open to select groups. Most of us become members by donating $10 to Foster Care to Success. There is a $5 signup bonus from Alliant, bringing down the net cost to just $5.
  • During the membership signup, indicate that you want to open a Savings account as well. Their savings account is worth having anyway due to its relatively high interest rate, currently 1% APY. (Take a look at their checking account too while you’re at it.)
  • Next add $510 to your Alliant savings account. Wait a couple days until the money appears.
  • Next apply for a Savings Secure Loan from Alliant, alternatively called Shared Secure Loan. Apply for a $500 loan for a 60-month duration.
  • Next pay down most of the loan. Pay $420 and leave $80 remaining. The goal is to get to around $455 paid off and $45 outstanding for the remainder of the loan as this is the magic number from a credit perspective.
  • At this point, you are paid off most of the way through the loan, and you technically don’t have to make payments until close the end. It might be worth making payments every few months to avoid inactivity.
  • As you get closer the end of the loan (the final six months or year), you’ll have real required payments to make. Be sure you stay on top of those and don’t default. Mark it down on the calendar.

Within a few months, the loan should show up on your credit report and benefit your credit rating.

I’ve written the basic details here, but if you’re holding by actually going through with this, do yourself a favor and read this very clear, step-by-step walk-through on myFico. It’s also worth reading the detailed explanation of the credit benefits of SSLT on myFico (2 posts) which are also well written.

Things to Know

  • This trick is not useful for anyone who already has a mortgage, car loan, or other installment loan.
  • This trick won’t help your credit immediately; it will take a few months for the benefit to trickle down.
  • Only do this if you have $500 to tie up for a few months.
  • Beware that there is always some risk that Alliant can change course and start hard pulling when applying for a secured loan.

Aside from benefitting your Credit Mix (10%), this SSLT will also benefit your credit utilization (30%) since your ‘installment utilization’ will be very low as most of the loan was paid off and only a small amount is being carried over month to month. Installment utilization is calculated in your credit rating separate from your revolving loan utilization (credit cards), hence the benefit to your Utilization, even if you have multiple credit cards with low balances.

Final Thoughts

I found this technique very interesting since I fall into the category of those without anything on their credit report besides for credit cards, and this is a neat way to remedy that. It’s doubtful that it will make a difference for my future credit card approvals since I have a thick and strong credit report based on revolving loans. In my case, it’s more about helping for other types or loans or financing options that might come up in the future.

For those with thinner credit files, this can even help with credit card approvals in the future.

Hat tip to @noonradar



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Alliant Credit Union (unsecured loan option)
Score: 99% chance this will work
Advantages:
* Works basically just like a Share Secure loan as far as early paydown
* The early paydown essentially negates any problem with the interest rate
Disadvantages:
* Hard pull (we expect on Equifax)
* People with low scores may be rejected

Can you comment if this loan would be beneficial to someone who only has credit cards and student loans? Are student loans installment loans and therefore would I not benefit much from taking out this type of loan?

Student loans are installment loans (you pay them in installments). If you’re a recent graduate, then the balances will be high and creditors know you can’t escape them through bankruptcy, so I suspect it’ll count against you. Positive history is positive history, tho. If you’ve been paying them down, I’m sure this trick won’t help you.

IOException is right. If you already have open installment loans (and student loans or installment loans) you should not expect any help from the technique.

The myFICO guidance explains why in the second post of that thread.

I’d be mildly interested in someone who only has student loans on his report AND which are flagged as “in deferment” (e.g. he’s a junior in college). I am almost certain that FICO counts these as normal loans when it does its installment utilization calculation…. BUT… if such a person were to use the SSL technique and get a big benefit, that would prove I am mistaken in this narrow case and that would be useful to know.

If it is a federally subsidised loan, then payments are technically being made to the loan servicer. It’s just the govt that’s paying them.

If it is an unsubsidised loan and no payments are being made, being in deferment doesn’t hurt (but doesn’t help). IMO, pay the interest if you can swing it. Compounding interest is a bitch when it’s not in your favour.

The person who mentioned that this process works at Navy Federal failed to mention that they do a hard pull on your TransUnion credit report. I mentioned this a couple months ago at the link below.

https://www.doctorofcredit.com/bank-accounts/is-opening-a-bank-account-a-soft-or-hard-pull/#comment-265231

Not sure if plagiarism.. Wouldn’t it have been good enough to just summarize the target audience then link to the MyFICO thread? Why paraphrase/re-organize the rest of the content for use on this site?

is scoring based on open accounts or if you had a car loan or mortgage and its closed now this would not be useful. One thing to note as well is that it will negatively affect your avg age of account so a new account may negatively impact your score for a while and will the positive in a few months offset the negatives

Hi Gary. This technique gives a strong benefit to anyone who has no open installment loans.

It’s quite possible that it gives an even greater benefit to a person with no installment accounts of any kind, closed or open, but if so the degree of extra benefit is small and difficult to test.

A wealth of test data shows a strong benefit to the technique for people with no open I-loans, especially when they choose a lender that does not do a hard pull (e.g. Alliant).

You are right that adding any new account will lower one’s AAoA. Good point. Here is what the myFICO guidance (on the SSL technique) says on that subject

=================

AAoA is a factor from the Length of Credit History category. Your AAoA will necessarily go down when you add a new account (e.g. this loan) which in itself can cause a score drop. But you shouldn’t worry about that.

One reason not to worry is that a decrease in AAoA often does not result in a score drop. If, for example, your AAoA went from 2.8 to 2.1, it would not cause a hit to your score, since FICO looks at the integer value.

Another reason is that, assuming you did cross over an integer value, you would likely cross back over it fairly soon. (Example: if your AAoA went from 3.2 to 2.8, you would be back to an AAoA > 3.0 in a few months.)

Finally, even if your AAoA goes down in the short term, the bonus from the other scoring categories is greater (for a person with no installment loans).

Any age restriction? My 7 mo old needs to get a mix since he only has a credit card on report 🙂

America’s First Federal CU will also do these (I had a couple of secured loans there, they both reported.)

This is also useful if you are at the beginning of your credit journey and want to add some ne trade lines that will help your average account age in a couple of years. In that case, get 2 loans, not just one.

I don’t think you mentioned that the cash in your savings account is freed up as the balance goes down. So, if you pay the loan down to $80, you could actually withdraw anything over that. In fact, you could make the payment from your savings account.

Also, don’t abuse this. The CU makes money from you paying interest, and paying off loans quickly actually turns a profitable one into a loss from the perspective on the CU, so don’t abuse.

What do you consider “abuse”? Are you suggesting that you should not pay the bulk of the loan off quickly, and instead pay it off one payment at a time? I doubt nearly as many people would be interested in doing this if it was going to cost them money.

just an FYI from my experience:

The loan officer was giving me a hard time about applying for a $500 loan for 5 years and he insisted on me move it to 1 year as its such a small loan and it shouldnt take me that long to rebuild credit (to me this is none of their dam business and they aren’t anyone of authority to tell me how long it will take for me to rebuild credit, but i let it slide) and so..
I complained that I would dispute it with CFPB or other government agencies if they didn’t honor the 5 year since its a valid option on their website.
They eventually gave in and let me do the 5 year loan for $500 but you may or may not run into something like this.

Hi Logan. Can you tell us the lender this happened with?

Alliant CU. I was able to get it but there was some pushback at first.

I heard of this happening on the MyFICO forums, too. Sounds like you just got unlucky by getting a reluctant loan officer.

Dan sounds right. It’s happened at Alliant but it is very rare.

Unfortunately, the reality is that we in the credit game are eventually going to run into a bank or CC rep who doesn’t understand his companies policies or is otherwise difficult. Open up enough bank accounts or credit cards and eventually it’s gonna happen even at the best institution.

Sorry you had bad luck with that rep but glad it worked out!

I recently closed my auto loan and have too many hard inquiries this year. My credit score is in ~ 700 because of that. Will this help to boost my score in near term?

Hi Sid. Assuming that your auto loan was your only open installment loan, then yes. This technique gives a strong benefit to anyone who has no open installment loans.

has anyone tried this with CCU?

I meant Consumer’s Credit Union. I can’t find their rate tables or terms for their secured loan.

CCU has HP’ed me separately for everything–membership, CC and even a Christmas Savings Club accout 😛 Proceed if you don’t care so much about TU..

Meh, this may not worth for hard pulls. thanks james.
I will try on alliant cu.

Hi ,

This is out of the topic question for Alliant Balance Transfer.

Can anyone tell me, had anyone got the BT from alliant into your checking account rather than transfer to card.

very interesting! my scenario I am looking for new car and may go for a car loan in 6 months. does this SSLT helps if i follow this process before my car loan? since I am anyway going for car loan sslt may not be much benefit after car loan? please advice. Thanks!

The advantage here is showing that u paid more than 90% on ur loan

Yes, the SSLT helps a great deal in preparation for a major installment loan like a car or a house — again, assuming that the person has no open installment loans during the runup to applying for it. Once you add the big loan (the car, the house, whatever) then the big loan and its largely unpaid balance dominates your installment utilization and you will lose many of the points you gained.

But who cares, right? You got the sweet terms for the house, which is all that matters. Not a problem if your score goes down because you don’t need it at that point.

For what it is worth, many of the folks asking questions would benefit a lot from reading the first two posts on the myFICO thread. I like this DoC piece a lot (!!!) but those first two posts give you the tools for understanding why the technique works, what situations it will work for, and what it won’t work for.

Just a thought….

Thanks Chuck and CGID

Is there any reason you can’t pay down to $5-10? Do you need to have it stay a bit shy of 10%?

Wouldn’t this also benefit someone who wants to bring their total installment loan balances down? I know you might need a lot more, but we’ve all been happy to let $15,000 sit in Chase for six months.

The key is finding a credit union that has a shared secure loan that doesn’t have any Gotcha’s. This isn’t as easy as you might think. You might have required minimum monthly payments of $25 or more, or you might pay off most of the loan only to find that the credit union manually changes your next payment date to be only 3-6 months into the future, etc.

When these things are in place, it prevents you from keeping your installment loan ‘utilization’, for lack of a better term, below 10% for a long period of time, which is where the real FICO benefits occur. So you should really read those links that were provided, and if you really want to try a different credit union, know the questions you need to ask them before applying for the loan.

TheManWhoCan gave a helpful reply. Great points.

Rav has asked a good question. As far as I know, you would get the same benefit from having a total installment utilization anywhere between 0.1% and 8.99%. It’s much like credit cards. The general wisdom is that your total CC utilization can be anywhere between 0.1% and 8.99% with the same scoring advantage.

But… and here’s the kicker…

When a balance is extremely low on an account, it can result in it being reported as zero (some CC issuers will occasionally do this for balances < $3). Worse still, with an installment loan it can result in the account being closed — rare but possible.

Back in April I did some careful planning with a very smart rep for my student loan handler (I was doing something very similar, reducing my huge student loan balance to a very low dollar figure so that I could still keep it open for years but pay almost no interest). She was on my side and trying to help me out. I asked the same question — was there any reason not to pay it down to $5 say. She said that their company had been known to comb through their accounts and close all of them that had an ultralow balance. She therefore advised me to make sure my balance stayed above $31.

Thus, I crafted the myFICO guidance so that it recommends lowering it to $44 (8.9%) and still gives you room to make $1 payments every six months to avoid the yearly inactivity fees, all while keeping the balance above $31. Of course, this 31-dollar cutoff is just based on what one CSR working at one institution told me. Still it seem reasonable to avoid ultra-ultra-ultra low dollar values for accounts if you need them to be reporting positive values for credit purposes.

Funny enough I had this thought when I was 18 and worked for a large regional bank. I put $1,000 into a CD and then tried to get a $1,000 loan using the CD as collateral to try and start building my credit. They did a hard pull and – DENIED! smh….

Even when you work for them, banks sure are stingy sometimes. The one I worked for only gave me $500 on their card even when coded as an employee. Now, only 2 months previous I got the SallieMae World MC with a $6000 line.

I thought the terminology was savings-secured loan or share-secured loan, i.e. a loan that is secured by your savings or shares.

Is it possible to get an Alliant savings without checking? So I can wait for the next checking bonus…

I don’t think so. I wasn’t even given options to choose or deny any accounts. I went through the application process and automatically had both savings and checking. Maybe I missed a checkbox?

You missed a checkbox–I was able to deny opening up a checking account with them so that I only have a savings.

Yes, it’s possible.

Miguel, you prob missed it. I only opened the savings. I might open the checking later on if I run out of higher bonuses. I did get the email invite for the $50 checking bonus, not sure if it has to be done by a deadline, I don’t recall seeing one on it.

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