Secured share loan - smart or not?

Discuss anything related to interest rates & fees, like balance transfer offers, low rate cards, annual fees, etc.
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CarefulBuilder14
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Secured share loan - smart or not?

Postby CarefulBuilder14 » Mon Oct 27, 2014 10:07 pm

I saw this thread on myfico:

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/penalized-for-not-having-installment-loan-what-does-this-mean/td-p/3151642

Some people there are recommending secured share loans from credit unions. The way they work is that you put like $550 into the credit union account, and it serves as collateral for a $500 loan. Over the course of the next four or five years, you pay about $9 a month. It works out to paying about $50 interest total (around 3.5% interest). The idea is that the loans are small and provide credit variety for people who otherwise only have credit cards. I'm curious for the opinions of people here about them.

I probably will not be buying real estate / needing a mortgage in 2015 or 2016 but may in 2017 or soon thereafter. I would also be able to make maybe a 30% down payment on a home.

The $60 in interest is small, but it is one more bill to pay each month, and it would mean one more financial institution / set of accounts to monitor. But my thinking is that if it even helps me get 0.1% lower on a mortgage rate a few years from now, it will easily be worth it.

I have never had any sort of installment loan, and my current understanding is that getting one will probably boost my credit score (and overall mortgage-worthiness) after it has been open for about 6 months. I understand I would also lose some (but hopefully not all) of the benefit once the loan is paid in full in 4 or 5 years.

I do not anticipate any upcoming purchases which I could finance in the form of an installment loan. Even if I was making such a purchase, I expect the terms would be less favorable or involve paying more in total interest than I would with a share secured loan. That is, it makes more sense financially to pay 3.5% interest on $500 than 7% on $10,000.

My main interests in getting a secured share loan would be to allow myself a FICO boost to improve my odds of getting good mortgage terms later. Or does a potential 750 FICO only from credit cards (but with a 30% down payment) nearly always get the best terms?

I would also like to have some 'wiggle room' about opening and closing travel cards for bonuses in the future without having a low AAoA hurt me too much. An extra $500 or $1,000 in travel bonuses would be nice, and I suppose a lower AAoA matters less once I have 4-6 cards that have each been open for 3 or 4 years with good history.

I'm not sure how much importance to assign to that "lack of recent installment loan information" line that appears on adverse action letters (the letters that give my FICO and say why I get a high APR / low CL).

I do not need to repair my credit in any way, or to get the first step or two going. That makes me a little different than many people on the myfico thread.

So should I get one? Two? Or just stick with credit cards until more is known about FICO 08 scoring?

I do still find the idea a bit bizarre. I use at least four different cards each month. That's four different bills I pay consistently every month.
Wallet: Prestige CSP SchwabPlat Freedom It Hyatt SallieMae AAPlat
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Letting new accounts cool off since May
Really not sure what I'll add next or when


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Vattené
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I cannot hedge enough here...

Postby Vattené » Mon Oct 27, 2014 10:43 pm

You probably know I don't have much experience in this area. Hopefully someone can correct me if I am way off base. Definitely take my advice with a grain of salt, but if I were you - given what I know at this point - I wouldn't do it. I too always got that same line before I got a car loan and I still always get the short AAoA line. My impression has been that in those situations, they have to give you something bad about your credit and that is what is hurting you the most. There is no indication of degree, though. Someone with collections would get a similarly worded line about those collections, but obviously that is a much bigger deal. It's kind of like a D student getting a high B on a test vs. an A student getting the same grade. The D student can be pulled up a great deal while it doesn't take much for the A student to dip.

I think you should talk to a mortgage officer or someone at a bank, though. Tell them your situation - that by the time you will need a mortgage you will have a strong credit profile with decent history but no debt diversity. They should be able to tell you how much an installment loan will really help you. They could also tell you whether a 750 on only credit cards makes you a golden borrower or if a few more FICO points could squeeze out a few basis points on a mortgage rate. 30% down payment on a home is very rare. Most don't even make 20% and have to purchase private mortgage insurance (PMI). You may hear that someone in your situation makes for a very low-risk bet.

Also, full disclosure: my credit philosophy has always been never to pay a cent in interest for the sake of a higher score, but to let my credit build over time so it is strong by the time I need it to be. That may very well bias me. I agree $60 in interest is well worth .1% less on a mortgage rate, but there are so many variables at play that I doubt anyone could tell you how likely that even is. If the waters are indeed that murky, I would save the $60 and not tie up the money if I were you.
-Vattené
FICO-8:
EX - 809 (11/16) | TU - 803 (11/16)
Primary Cards:
American Express EveryDay - $20,000 (10/14)
Discover it - $23,000 (2/14)
AU on Barclay Sallie Mae - $10,000 (8/15)
plus several store accounts of varying usefulness now

daniel2304
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Postby daniel2304 » Tue Oct 28, 2014 1:52 pm

The very simple way I look at it is you will give them $500, then you borrow that money and pay interest for them. I would be angry :mad:
All my posts are my opinions. All my posts mentioned "you" are merely for discussion-purpose only. No advice is given in any post at any time. It is also impossible for me to put effort to verify every statement that anyone has given.

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CarefulBuilder14
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Postby CarefulBuilder14 » Wed Oct 29, 2014 9:32 am

Well, it seems best to avoid it entirely - or at least until I learn a lot more and can be confident it will help me. I can save money and keep things simpler.

There are so many factors affecting a FICO score that it can be really hard to determine the situations in which a secured loan would help or hurt. Some of the people who report big FICO improvements probably have baddies and few, if any, healthy accounts. The fact that I already have five healthy accounts and no baddies might mean one more account would do little to help - regardless of whether it was a revolving or installment account. One person on myfico reported a 50-point jump. I imagine that person's previous FICO score was closer to 630 than 730.

I'll probably get a good-enough FICO boost, anyway, from a little more AAoA and having inquiries age. I might even forgetting to pay the secured installment loan one month, since it's not constantly in front of me (like my cards are each time I open my wallet).
Wallet: Prestige CSP SchwabPlat Freedom It Hyatt SallieMae AAPlat
SD: Arrival BrooksBros BCE ED IHG
Letting new accounts cool off since May
Really not sure what I'll add next or when

takeshi
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Postby takeshi » Thu Oct 30, 2014 7:49 am

CarefulBuilder14 wrote:Some of the people who report big FICO improvements

A lot of people also don't seem to have a good grasp of causal versus coincidental so it's tricky to tell for certain that a score change was due to the change that they attribute it to.

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Vattené
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Postby Vattené » Thu Oct 30, 2014 10:44 am

That is a good point. Many of those people posting on credit forums are likely getting serious about rebuilding and becoming more financially responsible. Paying bills on time and in full is the most basic and important credit advise. Many of those people may be working hard to get into this habit. They could take out one of those loans on advise for building their score, but there's no telling how much lower it would be (if at all) if they didn't take it out while still fosusing on the more mundane financial discipline aspects of rebuilding.
-Vattené
FICO-8:
EX - 809 (11/16) | TU - 803 (11/16)
Primary Cards:
American Express EveryDay - $20,000 (10/14)
Discover it - $23,000 (2/14)
AU on Barclay Sallie Mae - $10,000 (8/15)
plus several store accounts of varying usefulness now



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