Wednesday, May 17, 2006

How to improve your credit score - tip #3

Some people have little or no credit history, perhaps because they have always paid cash, just gotten out of school, are divorced or are recovering from a bankrupcy.

One way to help improve your credit score is to successfully pay down installment debts. If you are concerned that you cannot obtain a loan in the regular manner, you may be able to obtain a secured loan from a local bank. Secured loans require you to make a deposit at the bank, perhaps into a CD or Money Market Account and then allow you to use a certain percentage of the deposit as collateral for a bank loan.

For example, you deposit $5,000 into a Money Market account. The bank puts a hold on the deposit. It then allows you to borrow 90% of the $5,000 ($4,500). The bank will generally charge you an interest rate several points higher than what you're earning. One bank I've talked to let's you deposit the collateral at 4.25% and charges an extra 2.5% premium for the loan.

In certain circumstances, the bank may allow you to use the loan as the actual collateral deposited into the bank to secure the loan. To do this, however, you'll need a pretty good relationship with your banker and a fairly flexible bank.

Information request: please share what your banks are offering as terms for secured loans.

Have a wonderful day,

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