Thursday, May 18, 2006

Would you take out a loan you don't need in order to improve your credit score?

I have a challenging decision to make... one I've been putting off.

I need to improve my credit score. It's in the 600s, but could easily be better.

One method is to take out an installment loan and pay it regularly for 1-2 years, thus improving my credit score.

I'm thinking I could take out a secured loan from a local bank and pay 2.5% extra interest above what they will pay me on my secured deposit.

If I put $5,000 in, I will be able to borrow $4500 and would effective pay $303.75 in interest each year (assuming a 6.75% interest rate). The net payment would be $212.81. The proceeds from the loan would be invested to so I would in effect be paying myself back, but hte money wouldn't truely be mine for 2 years.

So, the fundamental quesiton is do I want to spend $607.50 over two years to improve my credit rating?

At this time I think it's not the greatest and I might have trouble getting a credit card, I'm not sure since I haven't tried in a while.

The blemish on my record is due to a period of unemployment that had wiped out much of my savings and created havic on my debt obligations. Although I came through it and rebuilt my savings, it hurt my credit rating.

Your advice would be well appreciated.

Thanks,
makingourway

3 comments:

makingourway said...

An idea...i have to put $5k into an account on hold earning, say, 4.25%.

If I put another $5k into prosper.com (if I can find enough good loans) at 13.5%, then I would be earning an average of 8.875%.

Subtract the 2.5% fee from the bank and I'm earning an average of 7.625% for each $5k.

What do you think?

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Anonymous said...

why do you need to improve your credit score? you just bought a house and am guessing that most other purchases you can make with cash if you are dropping over 1k on mother's day..