@Anonymous wrote:
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 house.
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.
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 (August 16):
This myFICO thread has been recently posted by other people on a number of prominent places on the internet (e.g. Reddit, Doctor of Credit). Therefore Alliant may be getting a much larger number of applications for their SS loan. We have received recent reports of it taking a while to get approved. So don't sweat it if it takes many days to receive approval or even your initial contact from the loan officer. In general our advice is not to swamp the customer service reps with calls unless there really is an urgent need, so I'd give them a lot of extra time.
Furthermore, there have been a few reports recently of loan officers (LOs) saying that they are not permitting a full 5-year loan if the amount is only $500. It's possible that this was just bad luck on the part of a few people, but it could also be the result of a vast uptake in applications for 5-year $500 loans. Our advice is to always stay friendly and non-argumentative. If the LO is not willing to give you the full deal, see what you can negotiate. Typically such rare LOs will offer a shorter time period (e.g. 36 or 48 months) or will request an increase to $1000. Regardless, we'd very much appreciate everyone during the next three months to let us know whether or not they are indeed getting the full 5-year $500 loan. Just make a comment on the end of this thread.
Final note:
The benefit most users of the technique are reporting is a 30-35 points boost to their FICO 8. So many people have reported that we feel comfortable regarding it as a well characterized 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. 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.
How do you keep a loan open for the full term when you made a huge payment to bring it down to under 10% utilization.
American Express: Platinum Charge, Optima, Business Gold, Delta Business Reserve, Business Cash, Business Plus
Barclays: Arrival+ WEMC (Closed)
Capital One: Savor WEMC, Venture X Visa Infinite
Chase: Freedom U Visa Signature, CSR Visa Infinite
Citibank: AAdvantage Platinum WEMC
Elan/US Bank: Fidelity Visa Signature
Credit Union: Cash Back Visa Signature
FICO 08: Score decrease between 26-41 points after auto payoff (11.01.21) FICO as of 12.24, EX: 816 / EQ: 825 / TU: 818
