topic Re: Loan to help credit diversity in General Credit Topics

Loan to help credit diversity

Anonymous — Mon, 06 Aug 2018 20:33:20 GMT

Hello, I was wondering what you all would suggest in terms of personal loans that can help boost my credit score, but not cost me too much in interest or fees.

I understand that there are credit services like SelfLender that allow you to make monthly payments for a year before you are able to withdraw money they have held for you until you are done with payments. I just wish they offered larger and longer loan options, since I already PIF $2000 12-month loan from TD Bank.

I would also greatly prefer a service that lets me pay down all but a small amount right at the beginning of my loan, so I don't run the risk of not having enough money when the payment date comes. Side note, I know I should never completely pay off a loan before the end of its term, but will paying down most of it also not be good either?

I hope to start a business someday (not anytime in the next 4-5 years) and I think something like this would help me secure more favorable rates for a business loan. Thanks for reading.

Re: Loan to help credit diversity

Anonymous — Mon, 06 Aug 2018 20:49:57 GMT

Great idea. My comments in blue below.

@Anonymous wrote:
Hello, I was wondering what you all would suggest in terms of personal loans that can help boost my credit score, but not cost me too much in interest or fees.

I understand that there are credit services like SelfLender that allow you to make monthly payments for a year before you are able to withdraw money they have held for you until you are done with payments. I just wish they offered larger and longer loan options, since I already PIF $2000 12-month loan from TD Bank.

Longer is the thing you want. The size of the loan won't matter as far as FICO scoring. Longer is better since it enables you to get the scoring benefit for a long time. Most of the scoring benefit will disappear when the loan is paid off -- thus the advantage of a long term.

I would also greatly prefer a service that lets me pay down all but a small amount right at the beginning of my loan, so I don't run the risk of not having enough money when the payment date comes. Side note, I know I should never completely pay off a loan before the end of its term, but will paying down most of it also not be good either?

Paying most of it down at month 1 is VERY good in terms of credit scoring. FICO 8 likes seeing it when you have open loans that are mostly but not entirely paid off.

It also helps you financially because you end up paying very little interest.

The trick is in finding lenders that will enable you to pay off most of it (pay it down to 8.9% of the original amount) at month 1, but then still allow you to keep the loan open for the full term. Such lenders just push back the due date of the next payment several years into the future.

We have two confirmed lenders that do this (Navy Fed and Alliant). We are looking for others.

I hope to start a business someday (not anytime in the next 4-5 years) and I think something like this would help me secure more favorable rates for a business loan. Thanks for reading.

Re: Loan to help credit diversity

Anonymous — Mon, 06 Aug 2018 20:54:55 GMT

Great! Thank you for the quick response

Re: Loan to help credit diversity

Anonymous — Tue, 07 Aug 2018 00:44:05 GMT

I just spoke to a representative from Alliant, and asked this question about their loans and frankly I was a bit confused by their answer. I posed a hypothetical scenario in which I took out a $2000 loan with a term of 24 months. Then, as soon as they give me the $2000 in my checking account, I pay off $1900 of the loan, thus leaving $100 (plus interest, which would be pretty inconsequential when calculated from the $100 balance) to be paid off over the 24-month term (about $5 per month I'd say). The representative said that if I paid off that much of the loan so quickly they would not allow me to stretch the remaining balance over the rest of the 24 months. As you said, "longer" is what matters with loans, so I would like to make monthly payments for 24 months, but I do not want to lose a lot of money on paying interest from a large balance. Is there any way around this? What if I paid off a little less, like $1800 or $1600? I hope my question makes sense to you guys!! Let me know if you need further clarification.

Re: Loan to help credit diversity

Anonymous — Tue, 07 Aug 2018 01:07:30 GMT

Okay, I decided I will go for the smallest possible loan amount at a 36-month term. I figure that over the course of 36 months, whatever interest I end up paying will not even feel that large once I divided it over 36 and figure out how much money I lose per month.

Re: Loan to help credit diversity

Anonymous — Tue, 07 Aug 2018 01:26:41 GMT

Are you a member of Alliant already? If so, when did you become a member?

Re: Loan to help credit diversity

Anonymous — Tue, 07 Aug 2018 01:28:10 GMT

I became one today

Re: Loan to help credit diversity

Anonymous — Tue, 07 Aug 2018 02:01:45 GMT

What I had heard is that Alliant typically wants you to have a membership with them for six months before they give you a loan. Has your loan been approved yet?

Re: Loan to help credit diversity

Anonymous — Tue, 07 Aug 2018 02:04:35 GMT

Nope, I will be notified within 3-5 business days. If that's the case, I guess I pulled the trigger too early. It was only a HP from TU so no biggie if I am not approved, I'll just try again in 6 months.

Re: Loan to help credit diversity

AndySoCal — Tue, 07 Aug 2018 02:07:42 GMT

If you actually need the loan then proceed as necessary. If you are doing it to try to help your FICO score then do not. The new account and the affect of the new account on your score is not equal to the potential in points gained. Credit diveristy counts for 10% of your FICO score. The impact of one new loan type on your score most likely will be very small if any at all.

Re: Loan to help credit diversity

stinastina — Thu, 09 Aug 2018 20:06:53 GMT

I disagree with Andy. If this is your only loan, then you will likely see a 20-30 point increase, provided you pay the loan down 91% before they report. The proof is in the thread about share secured loans.

I would have not have told the Alliant rep all that you did. It wasn't necessary and they only proved that they know nothing about credit mix.

Re: Loan to help credit diversity

AndySoCal — Fri, 10 Aug 2018 02:56:28 GMT

The impact of the new account and the inquiry will lower the score and not raise it. FICO has score reason codes related to recently open accounts.

Re: Loan to help credit diversity

stinastina — Fri, 10 Aug 2018 05:31:02 GMT

@AndySoCal wrote:
The impact of the new account and the inquiry will lower the score and not raise it. FICO has score reason codes related to recently open accounts.

You're still wrong. Read the first post in this 182 page thread.

https://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secure-technique/m-p/4506756

Re: Loan to help credit diversity

AndySoCal — Sat, 11 Aug 2018 01:29:14 GMT

It may work for a particular FICO model (not convinced and not named which model of FICO 8 it works for) but not guaranteed accross the board. If you are interested in getting a home FICO 8 is not used there older models. The older models it will not help your score hence the reason I supplied the FICO score reason guide. I would need to see a lot more data than this to convince me.

Re: Loan to help credit diversity

Anonymous — Sat, 11 Aug 2018 02:19:17 GMT

Hi Andy. Our OP is not readying himself for a home purchase.

The Share Secure Loan Technique has two parts, both essential. The first is to get a loan. The second is to pay off almost all of it at month 1 but still keep it open for the entire term of the loan (e.g. five years).

This has been tested hundreds of times. When someone has no open loans of any kind (and the Technique is intended only for such people) it has been shown to raise their FICO 8 scores by 25-40 points. The most recent thread about this is here:

https://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-paid-down-loan-is-rocket-fuel-to-TU-FICO-8/td-p/5317130

The SSL thread an earlier commenter gave you gives hundreds of case studies. Post #2 in that thread explains how FICO 8 scores installment loan utilization..... it's the drop from 100% to under 8.99% that gives most of the benefit.

Re: Loan to help credit diversity

AndySoCal — Sat, 11 Aug 2018 13:53:22 GMT

Yes in that same thread there are reports when the intial reporting of the new loan was reported the scores when down. Which is exactly my point. To spend money to add a loan type is ridiculus in my opinion. If I were to add this loan type and recieve the points stated I would come very close to a perfect FICO score( do not believe it). I have a simple philosphy of dollars beats points. In my case I would be approved for almost any loan that I could prove I could repay.

Re: Loan to help credit diversity

Anonymous — Sat, 11 Aug 2018 14:51:09 GMT

OK Andy. It's fine that you, if you had no open loans, would not yourself wish to implement the SSL technique and gain the extra 30 points (roughly) for your FICO 8 score. As you say, you have very good scores already.

On the other hand, no one is pushing you to do that, or even gently suggesting that you do that.

What is a problem is when you confidently tell others that there is no scoring advantage and then, when gently corrected by others (e.g. stinastina), dig in your heels. A better reply might be, "Well I don't see a need for it in my own situation, but I see now that I may be mistaken about the scoring impact -- maybe I didn't understand the part where you pay down the loan."

A lot of newcomers and even experienced folks have gotten real value out of the SSL technique (or its cousins). There are lots of things here on the forum about which the scoring experts are divided and have (good-natured) disagreements. The SSLT is not one of them -- Revelate (who discovered it), Thomas Thumb, SouthJ, BBS, iv, and many others are in total agreement in terms of how it works, based on hundreds of empirical cases (coupled with reason codes). They also base it often off of hundreds of cases of people who have exactly one loan that is mostly paid off, they make the final payment, and then their FICO 8 score drops by roughly 30 points. Not everyone implements the SSLT themselves, but none of those people deny that it does work basically as advertised for someone who wants to take the time to execute it.

PS. You mention that "To spend money to add a loan type is ridiculus." In case there is still a confusion on your part, the SSLT involves the person spending almost no money at all. Again, the key is in paying down the loan to a low balance at month 1. This results in paying only a couple dollars per year in interest, typically. You may still feel that anyone willing to purchase (at $2 per year) an additional 30 points to his FICO 8 score is ridiculous, regardless of his situation, but I just thought I'd clear that piece up in case you thought the cost was more than that.

Re: Loan to help credit diversity

AndySoCal — Sat, 11 Aug 2018 21:15:31 GMT

My FICO scores are over 800 most likely will sink below that for a while due my new credit card. The points for the loan will be there while the loan is open. The loan once it is paid off the points will go away. Plus it does not work for all FICO models.

Re: Loan to help credit diversity

Anonymous — Sat, 11 Aug 2018 21:44:55 GMT

Hi Andy. My comments below in blue.

@AndySoCal wrote:
My FICO scores are over 800 most likely will sink below that for a while due my new credit card.

The points for the loan will be there while the loan is open. The loan once it is paid off the points will go away.

Yes. The SSL Technique says exactly this. The technique is for people with no open loans, or people who are about to pay off the only loan they have. The person opens a loan, pays off almost all of it at month 1, and then keeps it open for the full term (e.g. five years). It's important to keep it open for as long as possible so that you don't have a score drop when it gets paid off.

Plus it does not work for all FICO models.

Yes. The SSL technique does not work for all FICO models. For example, the mortgage models. This is mentioned in the writeup the other commenter gave you. We always discourage a person from using the technique as a mortgage prep stategy, except in the case where the person has no installment accounts of any kind, open or closed.

Re: Loan to help credit diversity

Gmood1 — Sat, 11 Aug 2018 21:54:54 GMT

I've had 3 members in my household to use the SSL technique. It helped them all.
Any negative affect of adding the loan is more than washed away by the positive gains.
800's don't guarantee approvals. File diversity and age count more IMO.