Adding an installment loan -- the Share Secure technique

[Anonymous]

IMPORTANT NEWS FLASH!

In early January Alliant Credit Union stopped accepting further applications for Share Secure loans.  That product has been discontinued. 

We have been looking for alternatives to Alliant and are confident that we will find them in time.  You can monitor our progress on that "quest" here.  (Don't post on that thread unless you are offering to research one of the CUs or banks.)

Also feel free to continue read through the first two posts of this thread.  Those posts still apply, since other vendors offer  Share Secure loan products.

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A lot of people have been asking here on the Forum about a certain technique for improving your credit score, which is to add a small installment loan, pay most of it off, and then continue to keep it open for the full loan term (e.g. 4-5 years).  This thread aims to do two things:

(1)  Explain the big idea behind the technique, why it works, what people it will help, and what people it will NOT help.

(2)  To give you step-by-step instructions on how to implement the technique if you decide it is right for you, using a very particular lender as an example.  Note that many other lenders could be used, but we are choosing one (Alliant) for which we know it will work, just so you have a concrete example.  The same steps might work for a number of other lenders.

What is this thread NOT trying to do?  It's not a good place to discuss whether FICO is crazy for scoring installment loans the way they do, or for criticizing people who use the technique, or anything else like that. There are plenty of discussion threads that do that, and that's great.  But we are just trying to stay focused on the nuts and bolts of the technique and how to use it, so that people who want that info can get it easily.

We will continue to edit/update the initial info at the top of the thread to improve it.  And it's worth pointing out that we wouldn't be doing this now if a number of people, led by myFICO contributor Revelate, had not in 2015 brought this technique into a much broader awareness.

That said, here it goes.

What is the technique?
The technique is to add a small "share secure" installment loan to your credit profile.  After you do that, you then quickly pay off most of it, so that you owe < 9% of the original loan amount.  You then keep the loan open for the whole term of the loan (e.g. 4-5 years).

What is a Share Secure loan?
A Share Secure loan is a particular case of a secured loan, as opposed to an unsecured loan.  When you get a car loan, for example, that loan is secured by the car itself.  That's why the bank owns the title to the car, until you pay it off -- and it is why the bank can repossess your car.  A mortgage is another example of a secured loan. 
       With a share secure personal loan, you open a savings account with the bank or credit union and deposit the full amount that you plan to borrow.  Once you take out the SS loan, that amount is frozen in your savings account.  Typically, as you pay it off, more and more of those funds are unfrozen.
       Different lenders will use slightly different language for this same basic idea.  At Alliant, for example, you will hear it called their Savings Secured Long loan.  At some other lenders it might be called a Credit Builder loan.  At some credit unions it would be called a Share Secure Loan.  Don't worry about the exact phrase the lender uses.  Instead focus on whether the product works the way we are describing.  Choose a lender that lets you do all of what this technique entails.

Who will benefit from this technique?
The people who will benefit the most are people who have no installment loans, open or closed, on their credit report.  People who will also benefit (but not as much) are people who do have a closed installment loan but who have no open installment loans.

Who will not benefit from this technique?
*  People who already have an open installment loan.
*  People who need to improve their score very fast (e.g. < 60 days)
*  People who do not have $510 to open a new savings account. 
*  People who hope for some magic bullet, something that will raise their score a huge amount.
These people should NOT use this technique. They will be disappointed.

Does this technique stop working if something specific changes in my report?
Yes.  If you later add another, probably much bigger, installment loan, then this SS loan will stop mattering.  Instead, the "installment" portion of your score will be driven much more by the big loan with the big (mostly unpaid) balance.  But the technique will benefit you until that happens.  Thus, some people use the technique to help raise their score as they prepare to buy their first car or a new credit card.

Does opening an SS loan involve a hard inquiry (hard pull) to my credit report?
Some lenders might do that.  Many do not.  Alliant, which we will use as a case study, does not.  Alliant does a ChexSystem inquiry and a soft pull at one of the big three credit bureaus.  Neither of those will be visible as a hard inquiry.  (Note: Alliant does do a hard pull when a joint account is being applied for, or if a person is being added to an existing account.)

I am preparing to buy a house soon,  Will this technique help my mortgage scores?

The technique is really intended to help a person with his FICO 8 scores, not his mortgage scores.  But... if you have no installment loans of any kind, including closed ones, then it's worth doing.  Also, if getting a 20 point boost to your EX mortgage score would change the value of your "middle" score, then again it is worth doing.  Otherwise it does not appear to help a person's EQ or TU mortgage scores.

Does the size of the loan matter?

No.  A $500 loan works just as well as a $10,000 loan.  Almost everyone chooses a small loan amount.

Could there be another technique that could help me more?
Absolutely.  Getting your credit card balances in perfect shape will likely help you more.  Getting derogs removed from your report will almost certainly help you more.  So... while you can choose to implement this technique at the same time that you pay off CC debt and work on derogs, you should not mislead yourself over what will help you most.  Derogs and CC debt are far bigger drivers for your score.  Many people are best served by focusing on those things before they consider this.

What should my next steps be?
If you have gotten this far, it must mean that you have read all the stuff above and you can see that this technique is designed for you.  Be really sure about that.  Read the Who Will Benefit sections again.  If so, there are two more things for you to do.

*  Read the next section of this thread, called The Theory Behind The Technique -- or Why It Works.  It's really important for you to understand what you are choosing to do.  You are here on this site not to memorize commands from strangers, but to learn how the FICO model works, so you can make informed choices about what will benefit you most.  You can't do that unless you understand why you are implementing a particular strategy.  "Because the folks at the Forum said to" is not a good reason.

*  Read the third post in this thread, which will give the Step By Step Instructions.  Make sure they all make sense, and then get to work on them if you still want to.

UPDATE (Feb 14, 2017):

The benefit most users of the technique are reporting is a 28-33 point boost to their FICO 8.  So many people have reported this that we feel comfortable saying that this is a benefit you should expect. 

What we have very little reported data on is what this does to one's FICO 9 score.  Thus, anyone willing to take a swing for the sake of science, we'd love to hear about it.  FICO 9 is available through the myFICO 3B monitoring product.  The $30 product gives it to you quarterly, and there is a more expensive option that gives it to you monthly ($40).  Just add your results to the end of this thread.  As with any time you post "test data", you want to make sure your that your profile looks as close to identical as possible both before and after (same number of cards with a $0 balance, same CC utilization, same AAoA, etc.) -- that way we know that it the score change has been caused by the SS loan.

[Anonymous]

The Theory Behind The Technique
      or Why It Works

If you have no real idea how FICO scoring works, you need to first develop a big picture understanding of that.  Specifically you need to understand what the five scoring groups are, and what their relative weights are.  You can get that here:

http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx

Be sure you have reviewed that and understand it before reading further.

Why does the SS Loan Technique work?

Let's start by remembering that, first and foremost, it helps people who have no installment loans on their reports -- not even a closed one.  It also helps (though not as much) people who do have a closed installment loan, but who have no open loans.

To see the technique in action, let's assume you have no installment loans of any kind (closed or open) on your reports.

One of the five scoring groups is Credit Mix.  It counts for 10% of your score.  If all of your accounts  are of one type (all credit cards, for example) then you get a very low number of points from this category.  To get a high number of points, you want to show that you can manage a MIX of credit types.  Overwhelmingly what FICO will look for first is whether you can manage both revolving credit (typically credit cards) and installment loans.

To make this really simple, almost everybody here has at least one credit card.  So the bottom line is, if you want to get a lot more points from this category, you need at least one installment loan. 

Furthermore, there is some evidence that, even just in the Mix category, some FICO models weigh open loans more heavily than closed loans.  So the fact that the technique adds an OPEN installment loan is additional bonus.

Credit Mix (10%) is not, however, the only category that benefits.  There is a factor in the much larger Amounts Owed category (30%) which also benefits.  And that is something that we'll call "installment utilization" -- for a lack of a better phrase.  It is a lot like credit card utilization, but it applies solely to installment debt, rather than revolving debt.

That factor measures how much of your existing open installment debt you have paid off.  Here's how that factor works.  You take all your current open installment loans (only the open ones -- ignoring all closed loans).  You then add up all the amount you currently owe.  Call that CURRENT.  Then you add up the amounts that the loans were originally for.  Call that ORIGINAL.  Then you divide CURRENT by ORIGINAL and you get a percent.  (Do you see how that is a lot like the credit card utilization calculation?)  When that % is close to 100, or if you don't have any open loans at all, then you get no FICO points from this factor.  But when the % is very low (say 1-9%) then you get most or all of the points from this factor.

Total installment utilization is just one factor from this big scoring category.  Credit card utilization is in the category too and is more important.  But still, because the category (Amounts Owed) is so much bigger than Credit Mix, installment utilization ends up giving you a lot of points, when using the SS Loan technique, in addition to the points you get from Mix.  It's one reason that the technique can have a significant impact on your score -- you get help in two different areas.

In summary:
The technique, when used by a person with no open installment loans, gives you benefit from two different scoring categories: Credit Mix and Amounts Owed.

Two final thoughts:

(1) Average Age of Accounts (AAoA)

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).

(2) FICO 8 vs. FICO 9 vs. other FICO models

Not all FICO models reward you the same for having open installment debt that is mostly but not entirely paid off.  In FICO 8 Auto Enhanced, for example, you likely get a good deal of benefit from having a car loan, making the payments for a couple years, and then paying it off.  People in the forums are trying to guess how FICO 9 works in that respect -- maybe it allows you to have no open debt at all and still get much of the scoring benefit as long as you have a couple closed installment loans with strong payment histories.

Maybe!  Right now there is far less hard data on that as there is for FICO 8.  What is certain is that almost no lender is using FICO 9 as of March 2016, and until many lenders do, this technique will be immensely valuable to anyone who has never had an installment loan --  and even to those who have closed loan but none that are open.

A final thought about the "mortgage" flavor of FICO scores.  When a mortgage lender pulls your scores, he doesn't use FICO 8 or 9, but much older versions of FICO.  The EQ and TU mortgage score will probably not benefit from the SS loan technique, but the EX score will (assuming of course that your EX has no open installment loan on it).  If EX is already the highest of your three mortgage scores, and a mortgage is all you care about, then the technique may not be a good choice.

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You are now set as far as understanding the theory behind this approach.  If you are still interested, however, in reading some of the original research into the theory of this technique, feel free to take a look at this long thread from last year, started by myFICO contributor Revelate.

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Installment-tradeline-utilization-thread/...

Now, we finally come to the step-by-step instructions! 

[Anonymous]

Implementing the SS Loan Technique:

     Step By Step

As per our recent announcement, Alliant no longer offers Share Secured loans.  We are looking into alternatives and will eventually create a new thread once we have reliable vetted options.

If you are willing to get a hard pull, and your scores are 700+, then Alliant is still a good option.  Just get an unsecured loan for 60 months, and pay it down to 8% of the original balance in the first month.  The next due date should get pushed 4.5 years into the future.  Be sure to cancel any autopay you have set up and you should be good to go.

The other two options are Navy Fed and Ideal CU.  Navy Fed's drawback is that not everyone can get in.  Ideal requires a huge initial loan amount and has not yet had anyone here test it (though in principle it should work).  Feel free to follow these and other options on the Quest For An Alternative thread.

[Anonymous]

this is great ! thank you !

Im going to have to wait 3 months to pay off my 1k installment loan and then i will try this . lol

thanks once again !!!

[Anonymous]

Excellent! Very thorough! Consolidates all of the wisdom found in the various threads on this topic and then some.

I wish I'd had this guide when I went through the process!

[Revelate]

Thank you for the writeup CGID!

I always meant to make the original thread original post or two more user friendly to summarize the results found in the hundreds of following posts, but never got around to doing so.  I greatly appreciate your taking the time and effort to do this!

Only thing I'd note after a more comprehensive read through (mea culpa) is to note the bulk of the points in the FICO 8 model are from having an open installment loan, closed loans (or revolving accounts) don't seem to truly be relevant from a scoring perspective; whether this is labelled credit mix or simply the FICO 8 implementation is pretty much impossible to state.

[Absolution16]

Thank you so much for this in-depth guide!  I will definitely be looking into doing this very soon!

[Absolution16]

I have begun my journey into the SSL world.  I followed the in-depth guide and opened a savings account with Alliant this afternoon.

Made a $10 donation, deposited $510 into the savings account from my external checking account, set up my security questions/answers, and verified my e-mail address.  Once the funds are deposited into the savings account by next Monday or so, I will apply for the loan.

My Not So Brief History

Due to my situation, especially with recently closed credit card account and now 3 new credit cards within the last 2 months (Chase Sapphire Preferred, AMEX Blue Cash Everyday and now Barclaycard Arrival World), my FICO score took a big dip, most probably due to drop in Average Age of Account.  Since I am using the CSP card for my business expense, I am not confident about keeping that card's utilization below 10%, but I figured that starting up a history with an installment loan would help me in the long run.  SInce I am not looking for a new credit card until at least October or November of this year, I am hoping that everything will stabilize by then.

I will post updates as they come, so hopefully others who decide to follow this path can use them as data points.

Thank you again!

[Anonymous]

Sounds good, Absolution. Looking forward to reading your updates.

Regarding keeping your utilization down, you probably know this, but you can charge as much as you want on the card as long as you pay down the balance before the statement closes. Whatever is one the statement is what reports (with most credit card issuers, that is). Of course, if you need to wait for reimbursement from your employer (or for accounts receivables to come in, if it's it's your business) before you can pay it down, that's another story.

One thing to keep in mind, too, is that since you say you're not looking to app for a new credit card until later this year, it's not all that important to have your utility low in the mean time (at least in terms of your FICO scores, that is). As long as you get your utility optimized a month or so before you app, you will get the full benefit at that time.

[Absolution16]

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@Anonymous wrote:

Sounds good, Absolution. Looking forward to reading your updates.

Regarding keeping your utilization down, you probably know this, but you can charge as much as you want on the card as long as you pay down the balance before the statement closes. Whatever is one the statement is what reports (with most credit card issuers, that is). Of course, if you need to wait for reimbursement from your employer (or for accounts receivables to come in, if it's it's your business) before you can pay it down, that's another story.

One thing to keep in mind, too, is that since you say you're not looking to app for a new credit card until later this year, it's not all that important to have your utility low in the mean time (at least in terms of your FICO scores, that is). As long as you get your utility optimized a month or so before you app, you will get the full benefit at that time.

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UPDATE:  Transfer from my external checking account into Alliant savings account has been completed, though Alliant savings account only shows my funds as current, but not available yet.  I anticipated, from the guide above, that it might take an extra day or two to have the funds become available, so it definitely looks like next Monday or Tueday will be the day I will apply for the loan.

Regarding the report date of balances, my situation is weird right now.  Chase reported to the bureaus after the 1st statement was cut 3 weeks ago.  Meanwhile, AMEX, which already had its 1st statement cut on the 17th, has yet to report anything.  Barclay, at the other end of the spectrum, reported immediately after I applied.  Funny thing is, I have yet to receive the Barclaycard in the mail yet!  I am not sure when these 2 banks are going to regularly report balances at this point.  I'd prefer all these accounts plus this loan to report all within a 10-day period, so that it would be easier for me to manage the balances when the time comes for a new application.

Thank you for the heads up!  I am very curious as to how all of this will pan out.  Hoping to recover my scores back up to where I was at end of January, by the time I plan to apply for a new card in October or November....

QUESTION: Can you be an authorized user on a specific card brand AND apply and own the same specific card brand at the same time?