topic Re: Take out small loan and pay it off right away... in General Credit Topics

Take out small loan and pay it off right away...

joestay — Sun, 07 Feb 2016 05:12:24 GMT

I was thinking about taking our a small loan of $500 with a term of 10 months, but paying it all within a month or two. I really don't need the loan but was wondering what doing what i was thinking will do to my credit score. Will it improve the score right away? I have no installment loans, just credit cards.

Re: Take out small loan and pay it off right away...

elim — Sun, 07 Feb 2016 05:20:17 GMT

It's best to take out a long term loan and pay most of it off and keep it open as long as you can.

Alliant credit union has some nice ones for $500 minimum.

edit for link:

https://www.alliantcreditunion.org/borrow/get-a-credit-union-personal-loan#features

Re: Take out small loan and pay it off right away...

joestay — Sun, 07 Feb 2016 05:24:55 GMT

Thanks elim,

When you say pay most of it off, do you mean to just pay like 95% of it off within the first month and then let it stay open for as long as the term is?

Re: Take out small loan and pay it off right away...

elim — Sun, 07 Feb 2016 05:29:08 GMT

I would do a search on the forums for "alliant share secured loan" and some posters with experience will have some info. Someone will probably fill in some here as well.

Re: Take out small loan and pay it off right away...

Anonymous — Sun, 07 Feb 2016 05:32:35 GMT

If you have no installment loans of any kind, closed or open, the your plan is a good one. (With some substantial improvements suggested below.)

In a few weeks, some friends of mine here and I will publish a short step-by-step guide on how to implement this strategy pretty painlessly. If you can wait a few weeks, then you can read that then.

If you are certain you want to get started before then, however, then I would recomend the following:

* Make it a 60-month loan rather than a 10-month loan.

* Choose a $500 Share Secure loan. The interest rates are very low.

* Pay off most of the loan but not all of it. Pay it down to $44. (That's < 9% of the original amount.)

* Then make a tiny payment (maybe $2) once every six months to keep the loan active. You want the loan to stay open for the whole 60 months,

* Use Alliant if you want a good lender that has been very friendly to this approach.

If you want a LONG but recent thread that discusses this, you can find that here:

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Should-I-get-an-installment-loan/td-p/4383085

But if you can wait a couple weeks, as I mention above, we'll be distilling that down to something very brief and easy to follow. I'd suggest you wait for that.

Re: Take out small loan and pay it off right away...

joestay — Sun, 07 Feb 2016 06:09:09 GMT

Thanks for all the info. I did the search and was reading up on it. I do have an auto loan that was paid off and in good standing about 4-5 years ago. Now, I have no open installment loan. My current FICO are between 780 to 800. I was just wondering if I do what was suggested, will it improve my score some more. I will be looking for a mortgage loan in the next month or two and was thinking if I need an opened installment loan reporting since I only have 2 open trade line on my report right now.

Re: Take out small loan and pay it off right away...

Anonymous — Sun, 07 Feb 2016 06:33:43 GMT

If you are planning to buy a house in a month or two, you do not have time to try opening an installment loan as a technique for score improvement.

Instead you should be focusing on other things: for example, paying all your credit cards to $0 except one, which would have a small positive balance on it.

A credit score of 780-800 is already plenty high for best rates on a mortgage, anyway.

Re: Take out small loan and pay it off right away...

takeshi74 — Mon, 08 Feb 2016 14:13:09 GMT

@joestay wrote:
My current FICO are between 780 to 800.

FICO 8's? Why are you worrying over this? 740-760 is the typical range where best terms are offered.

@joestay wrote:
I will be looking for a mortgage loan in the next month or two and was thinking if I need an opened installment loan reporting since I only have 2 open trade line on my report right now.

General advice is no new credit 6 months to 1 year prior to a mortage though it really depends on the strength of one's credit profile. Your scores look good but a new credit account this close in may still raise red flags.

@joestay wrote:
I really don't need the loan but was wondering what doing what i was thinking will do to my credit score. Will it improve the score right away? I have no installment loans, just credit cards.

Keep in mind that Credit Mix is typically ~10%. Though that doesn't mean that you stand to gain 78-80 points. At the upper end of the scoring range improvements are generally harder to come by. Also, Credit Mix is not the only factor that matters. You'd incur a hard pull and you'd drop your AAoA. Not to mention potentially raising red flags with your mortgage lender. At this stage it's far too late to be relying on new credit to help. If you were a year out it might provide some small benefit but I'd guess even then it wouldn't provide much benefit. If approved and finalized, you'll have an installment anyway.