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 CreditGuyInDixie from myFico for doing a fantastic job explaining this in full detail.

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