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.

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%?

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.

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.

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

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.

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

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!

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.

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.

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.

That's my sweetie!

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.

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

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

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".

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.

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%).

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.


Based on this comment...

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

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.

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

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.

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?

I think it's a great idea.

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.

Did you do it with a bank or CU? Did they do a pull?

I did it with my CU and they pulled Experian.

Here's what I'm gonna do......My Chase has a 0% balance transfer rate until March 2006. I paid off my balance in full so now I have access to $20,000(which is my credit limit). I will transfer that Chase money to an ING account I'm about to open, earning me 3%. When my monthly statement comes in the mail from Chase, I will pay the minimum balance out of the ING savings account, and then once again turn that money around from Chase back to ING, until the 0% offer is over. At that time, I will PIF Chase as to avoid any interest charges, giving me back my $20,000 CL, along with about 400 and change in interest. I'm sure it's been talked about on here already, but though I'd bring it up again.


Forgot to add, I know this is going to give me a huge hit to FICO as utilization will be high, but I have no intention of applying for anything soon, so to me at this time, the FICO hit won't matter.

One reason for doing this is that it gives you quick access back to your own money. One reason people frequently give for not getting a secured card is not having the money to do it. But going this route, you set aside the money long enough to take the loan on it. It gives you a good TL sooner than saving up for the secured, and when you are done you have your savings.

Of course, this assumes you need the money and aren't holding out for that .1% interest.

BTW - my CU offers loans on CDs for I think 1% over (or was it 2?). I don't remember, but it was low. Dunno if it would take a credit check though and I don't need another installment tl right now.

But good idea.

I love this idea. A friend told me about this last year and now I have two $1500 dollar loans out. What are the disadvantages of paying off this type of loan early? In addition, would making a large payment hurt my score?