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Is this a good plan for a loan?

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pdxuser
Contributor

Is this a good plan for a loan?

I want to get an installment loan on my credit report to help me get a mortgage later on. I was told one 12-month loan of any value would be sufficient. I'm considering getting a $500 low-rate secured loan from my credit union. Could I just pay back $489 immediately, then pay an additional $1 plus interest for each of the 11 remaining months? Or would my CR think I got an $11 loan because that's what my high limit would be reported as? Is there some other problem with this plan?
Message 1 of 9
8 REPLIES 8
Anonymous
Not applicable

Re: Is this a good plan for a loan?

Getting a $500 loan for 1 year is not going to so much for your credit file and paying off 90% of the balance right away is not going to show credit history.  thwe whole point of wanting a mix is the CRA seeing a monthly payment that you take out and pay off in a reaosnable time.  If you pay most of it right away then it does not show a prolonged history and ability to budget around that payment.  Also, a 500 loan will be inconsequential in regards to a house loan.  Now, if you had a 2K loan that you took out for 12 months and paid off in like 10 that would show ability to get a larger installment loan, ability to budget over a time period, and good credit worthiness as you paid it off a littel early.  As far as FICO, I am not sure that it would be a big push verses the small loan.  But, to an underwriter, they will see the 500 loan that was paid off right away as exactly what it was.... You trying to "bolster" your credit profile.  They will see a more substantial loan that is paid off a little early as a sign of financial responsibility. Not to say you should take out a big loan or anything.  For FHA, I wouldn't even worry.  I would just make sure you have 3 open credit lines that are paid on time every month for 12 months prior.  My wife just bought a 300K+ house without an open installment account no problems. 
Message 2 of 9
pdxuser
Contributor

Re: Is this a good plan for a loan?

DallasLoanGuy said in the mortgage forum that "the amount of your credit lines are ZERO part of the approval process" for a mortgage and "I like to see 12 months" of an installment loan. So that's where I came up with a small 12-month installment loan. I would have cards in addition to that, of course.

 

As for how quickly I pay off the loan, how would anyone know once it's all paid and closed? Wouldn't they just see a $500 loan, $0 balance, closed, with 12 OKs in a row?

Message 3 of 9
pdxuser
Contributor

Re: Is this a good plan for a loan?

$500 is the minimum for which I can take out a loan. If I pay off $489 right away, I only pay the tiny interest on the remaining $11. The remaining $11 gives me a buck to pay off each remaining month, resulting in an OK mark each month on my credit report. If I paid it all off right away, I assume I would have one OK the first month and 11 blank spaces.
Message 4 of 9
Anonymous
Not applicable

Re: Is this a good plan for a loan?

What's on your credit report now for revolving and installment, past and present?
Message 5 of 9
pdxuser
Contributor

Re: Is this a good plan for a loan?

No credit history. My goal is a mortgage down the road. My plan so far is 3 cards and 1 installment loan to get there.
Message 6 of 9
Anonymous
Not applicable

I think it is good idea for ur planning. How many interes...

 

 

 I think it is good idea for ur planning.

How many interest you have to pay for these $11 in 11 month?

Message 7 of 9
cobra19
Valued Contributor

Re: Is this a good plan for a loan?

I was told one 12-month loan of any value would be sufficient.

 

 

Who told you that? Before I got my mortgage (1998) I had never had an installment loan. My mortgage is through Chase and, at that time, all they cared about was my income and debt-to-income ratio. My credit file consisted of a bunch of revolving accounts.

New York Yankees - 2009 World Series Champions. 27... and counting.....
Message 8 of 9
pdxuser
Contributor

Re: Is this a good plan for a loan?

DallasLoanGuy told me that. While I doubt it's necessary, I do believe it helps your FICO score by way of credit mix, and is especially helpful for the slightly different FICO models used by Desktop Underwriter that weight installment loans more heavily. Plus, on a manual review, it's probably nice to see that a borrower has demonstrated that they can make regular monthly payments over a long term, which is a different behavior than using a credit card.

Message 9 of 9
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