Make Money, (re)build credit and save money

[DHK]

Hey guys,

 

I've been working on some ideas lately for people like me who really don't want more credit cards, but need ideas on how to build credit. I've found a way to build credit WITHOUT a credit check AND you can build up your savings account balances as well. And if you do it right - you can MAKE money - instead of paying interest, you'll be EARNING interest.

 

This idea involves the use of secured loans. Basically, you need to start with some money. Think of it like getting a secured credit card - but without the high rate of interest or annual fees.

 

Step 1: Set up a CD account to borrow against. DCU offers CD's as low as $500. As of February 25th, 2005, their CD rate for a 12 month term CD is 2.32%.

 

Step 2: Take out a loan against the CD. This doesn't involve a credit check AND the loan activity IS REPORTED! The interest rate you pay is 2.5% above the CD rate.

 

Key question: Can I EARN MORE than 2.5% on this money?

 

Step 3: Put the borrowed money in a high-yielding savings account. I suggest INGDirect. As of February 25, 2005 their interest rate on their no-minimum balance, no fee savings account is 2.6%. That's .1% over what you are PAYING!

 

Step 4: Use THIS money to repay your secured loan. I personally suggest paying it down 50% for the first payment, then equal payments for another 5 months (6 months total repayment period).

 

To summarize: Your CD still earns money: 2.32%. You borrow the money for an additional 2.5% on top of the CD rate. You invest the borrowed funds in an ING Direct savings account at 2.6% and MAKE money!

 

Why did I choose DCU for this program? 2 reasons: 1) the borrowing rate is only 2.5% over the CD rate. (Patelco actually does it for 2.25%) 2) this is more powerful - You can always add to the CD balance at any time as long as you contribute $100 or more and your CD term is 12 months or less. This allows you to save more aggressively. This also means that it's easier to re-borrow the money at higher balances.

 

Keep in mind that you are only using the borrowed money to repay back this loan. If your ongoing cashflow still has room for additional savings, you can still contribute to your CD every month for $100+. This allows you to grow your emergency funds and other savings needs.

 

I plan to do this plan for loans of $1k, $2.5k, $5k, all up to about $15k and to only keep a loan for 6 months at a time.

 

Note: Interest rates can change at any time.

[Clarkfan2]

I must be missing something here. If the CD is like 2.3 and the loan is @2.5% more than the going rate like 2.3+ 2.00% =4.8 how are you getting a head investing at 2.6%?

Edited February 26, 2005 by Clarkfan2

[DHK]

Keep in mind that the CD is still earning interest as well.

 

CD rate = 2.32 earnings

 

Interest rate on loan = 2.32 + 2.5% pay.

 

The 2.32% cancels itself out. You pay it, but you earn it as well.

 

The only part you worry about is the 2.5% above the CD rate.

 

Does that make sense?

 

Think of it as a NET cost/profit after all is said and done.

Edited February 26, 2005 by DHK

[Quit Screwing Me]

I can see where you're coming from, but only if you're using this as a tool to rebuilt credit. Keep in mind that the interest you pay on the loan is not tax deductible, but the interest you receive on the accounts are taxable.......so you would probably be coming out even, but with the advantage of rebuilding credit.

 

For the sold purpose of just obtaining a secure, steady, high interest yield, yes, go with Ing or EmigrantDirect without taking out loans etc.

[DHK]

That's very true. I didn't even consider any tax implications.

[Clarkfan2]

I wouldn't worry about paying tax of $49.20 if we use $1000.00 in this case.(As a CD and in ING savings.) Instead of making .10% why not make an effective 3.9%, 5.9% , 12.99% or 19.99%(tax free) by using it to pay off credit cards instead of trying to get more of them. Your payment record could help your FICO since your utilization will have dropped.

Edited February 26, 2005 by Clarkfan2

[ficosucks]

this idea has been around for a long time. this is not new thinking

[radi8]

this idea has been around for a long time. this is not new thinking

<{POST_SNAPBACK}>

 

Certainly the idea of using OPM to make money for yourself isn't new, lol.

But I appreciate DHK posting it as it hasn't been discussed here yet- and is a great way to start up a discussion.

 

 

I believe one of the key points was to build credit without applying for any additional cards or even having an Inquiry pulled.

Making a couple bucks along the way is a nice addition!

[DHK]

Thanks Radi8!

 

Here are the main benefits of this type of plan that I can see:

1) No credit checks!

2) No new credit CARDS (great plan for the less-disciplined - like me!)

3) No annual fees!

4) No declines!

5) Can earn interest on borrowed funds

6) Or, you pay very little interest on the funds borrowed

7) New tradelines established for higher loan amounts (Credit report will show that you have repaid a $25k loan within 6 months; MAY be approved for higher CL's than you would otherwise.)

8) Can continue to build your CD account with more contributions (DCU feature)

9) Build a solid financial future by leveraging your growing financial assets

10) ANYONE can do it - scores of 350+ can and will be approved!!!

 

 

Here's my math on a sample loan of $1,000 for 6 months:

CD earns: 2.32% or $11.60 EARNED

Loan cost (2.5% above CD rate): $11.60 + $12.50 = $24.10 PAID

ING earns 2.6% on $1,000: $13.00 EARNED

 

So take your earnings total: $24.60 and subtract your loan COST of $24.10 and you MADE $.50.

 

Granted, you're not going to get rich doing this, but you can at least not PAY interest while building your credit.

Edited February 27, 2005 by DHK

[LKH]

I wouldn't worry about paying tax of $49.20 if we use $1000.00 in this case.(As a CD and in ING savings.) Instead of making .10% why not make an effective 3.9%, 5.9% , 12.99% or 19.99%(tax free) by using it to pay off credit cards instead of trying to get more of them. Your payment record could help your FICO since your utilization will have dropped.

<{POST_SNAPBACK}>

 

 

Did you really read what was suggested? The idea was to NOT obtain new credit cards, but to build up a credit history at a very minimal cost.

 

IMO, it will help some. But keep in mind that you still need a mix of credit like cc's, personal loans, installment loans, and a retail acct.

[breeze]

Clarkfan, not every single post on this board is about getting credit cards. This was about how to build your credit history WITHOUT getting a credit card. sigh.

[Quit Screwing Me]

Clarkfan, not every single post on this board is about getting credit cards. This was about how to build your credit history WITHOUT getting a credit card. sigh.

<{POST_SNAPBACK}>

 

 

That's my sweetie!

[CheapDB]

Thanks Radi8!

 

Here are the main benefits of this type of plan that I can see:

1)  No credit checks!

2)  No new credit CARDS (great plan for the less-disciplined - like me!)

3)  No annual fees!

4)  No declines!

5)  Can earn interest on borrowed funds

6)  Or, you pay very little interest on the funds borrowed

7)  New tradelines established for higher loan amounts (Credit report will show that you have repaid a $25k loan within 6 months; MAY be approved for higher CL's than you would otherwise.)

8)  Can continue to build your CD account with more contributions (DCU feature)

9)  Build a solid financial future by leveraging your growing financial assets

10) ANYONE can do it - scores of 350+ can and will be approved!!!

 

 

Here's my math on a sample loan of $1,000 for 6 months:

CD earns:  2.32% or $11.60 EARNED

Loan cost (2.5% above CD rate):  $11.60 + $12.50 = $24.10 PAID

ING earns 2.6% on $1,000:  $13.00 EARNED

 

So take your earnings total:  $24.60 and subtract your loan COST of $24.10 and you MADE $.50.

 

Granted, you're not going to get rich doing this, but you can at least not PAY interest while building your credit.

<{POST_SNAPBACK}>

 

Actually, aside from the issue of building credit, you are not actually making any money with your plan. In fact, you are losing money. You must account for what's called the "time value of money" due to inflation. For you to become ahead and make money with any investment plan, you must beat the average rate of inflation, current around 3.0%. So, with the CD alone, when it matures, you would have lost .68% of the purchasing power of your initial deposit at the end of this year. Taking out a loan at 4.82% is only going to increase your loss to about 5.50% of the value of the money (4.82% monetarily, .68% due to decrease in value). If ING pays you 2.6% on the same amount during the year, then you decreased your loss from 5.5% to 3.10%.

 

Therefore, theorically, your scheme has shown us how to effectively lose 3.10% of a money deposit in a CD to help build some credit. In my opinion, there are much cheaper ways to rebuild credit.

 

When CD interest rates rise above the rate of inflation again, then your scheme would actually work because then you would not be outright losing money from the CD alone. Now, however, is not really the time to try to make money from saving account deposits.

[HeMissedOut]

Installment accounts (personal loans) do not help your scores that much. In fact, too many of them can hurt it.

[hegemony]

too many of them can hurt it.

<{POST_SNAPBACK}>

not true. too many WITH BALANCES can hurt. TOO many of ANY kind of accounts with balances can hurt.

[HeMissedOut]

too many of them can hurt it.

<{POST_SNAPBACK}>

not true. too many WITH BALANCES can hurt. TOO many of ANY kind of accounts with balances can hurt.

<{POST_SNAPBACK}>

I have 7 installment accounts (1 car and 6 student loans - transferred several times then consolidated). Only one (the car) has a balance. One of the reasons FICO gives that is lowering my score is "too many installment accounts".

[hegemony]

I have 7 installment accounts (1 car and 6 student loans - transferred several times then consolidated).  Only one (the car) has a balance.  One of the reasons FICO gives that is lowering my score is "too many installment accounts".

<{POST_SNAPBACK}>

I have 13 student loans. All but one is closed (consolidation). And a mortgage and auto, both open, reporting. I've never gotten the "too many installment accounts" is a weak/bogus negative; myFICO always tells you something is negative.

 

The OP was not suggesting getting 800 of these...just doing it for a positive trade.

Edited February 28, 2005 by hegemony

[hegemony]

the "reasons" FICO gives are often bogus. My spouse has a score in the low 800s. FICO says her score is "so low because the amount owed on your revolving/charge accounts is too high." This is bogus because the amount owed is less than $800 and constitutes less than .05% of her total credit lines (i.e., utilization is <.05%).

[HeMissedOut]

I have 7 installment accounts (1 car and 6 student loans - transferred several times then consolidated).  Only one (the car) has a balance.  One of the reasons FICO gives that is lowering my score is "too many installment accounts".

<{POST_SNAPBACK}>

I have 13 student loans. All but one is closed (consolidation). And a mortgage and auto, both open, reporting. I've never gotten the "too many installment accounts" is a weak/bogus negative; myFICO always tells you something is negative.

I'm no FICO expert and since of us have insider information on their algorithm, I can not pass judgment on whether FICO's reasons are bogus or not. I'm just sharing a personal experience that could possibly affect others who end up in a similar situation.

 

The OP was not suggesting getting 800 of these...just doing it for a positive trade.

<{POST_SNAPBACK}>

Based on this comment...

I plan to do this plan for loans of $1k, $2.5k, $5k, all up to about $15k and to only keep a loan for 6 months at a time.

 

Note: Interest rates can change at any time.

<{POST_SNAPBACK}>

800 is an exxageration, but it does sound like he plans to do quite a few.

[DHK]

I plan to do quite a few - so I can show that I'm responsible for larger loan amounts. That's my plan.

 

Keep in mind that my credit has been TRASHED with late payments due to being unemployed for 6 months and being near 100% utilization on all lines. I wasn't following any good financial plans. Now that I'm on the road to better things, I wanted a plan to at least show that I can be responsible with new, recent tradelines for larger amounts.

 

I don't worry about FICO. I need a cleaner and better credit report that shows that I'm responsible with on-time payments with large amounts borrowed.

[hegemony]

I have 7 installment accounts (1 car and 6 student loans - transferred several times then consolidated).  Only one (the car) has a balance.  One of the reasons FICO gives that is lowering my score is "too many installment accounts".

<{POST_SNAPBACK}>

did you see the point about the bogus negative reasons cited by myFICO?

[CheapDB]

I plan to do quite a few - so I can show that I'm responsible for larger loan amounts.  That's my plan.

 

Keep in mind that my credit has been TRASHED with late payments due to being unemployed for 6 months and being near 100% utilization on all lines.  I wasn't following any good financial plans.  Now that I'm on the road to better things, I wanted a plan to at least show that I can be responsible with new, recent tradelines for larger amounts.

 

I don't worry about FICO. I need a cleaner and better credit report that shows that I'm responsible with on-time payments with large amounts borrowed.

<{POST_SNAPBACK}>

 

Maybe I'm missing something, but I still don't understand why one would choose to do this as opposed to just getting a secured or sub-prime credit card and carrying a low balance or paying off monthly instead.

[banditone]

I haven't found any banks or CU's that will do a loan without pulling a credit report. Does anyone know of any that won't do a pull?

[latrues]

I think it's a great idea.

[rising score]

I decided to do the installment loan to help increase my score. I wanted to add an installment loan to help my "mix of credit" since all I had were credit cards and a store card. The loan hit my report today and tanked my score. I am hoping for a good recovery when I begin to pay it off.