If you are accustomed to receiving a tax refund each year, you probably have a standard plan for the money. Maybe you buy some trinkets, pay off some debt, go on a trip, etc. Have you ever thought about using a part of your refund to help your future self out? Now, I’m not talking about investing on this page. That is certainly something to consider with your refund. Here, I’m talking about improving your credit score, This is especially true if you currently have a score that is considered poor(below 619) or fair(620-660). You may not want to consider this advice if you are sitting above 700. Sure, it could help, but you wouldn’t benefit as much as something who can’t currently get a loan or who barely gets approved with a high rate.
For as little as $500(in most cases), you can set aside cash and use it as collateral to purchase a “cash-secured loan.” Here is what that means in plain English: 1) You put $500 in a bank account that belongs to you. 2) You then apply for a loan for $500 that is tied to that same account. 3) The bank freezes the $500 and extends a loan to you. It’s a very low risk to the bank since they already have the cash, so it isn’t like they are losing anything. 4) You then make monthly payments on your loan that are applied to your credit report, which shows as a positive account with a good history the longer you go.
Most banks have this product. If your bank doesn’t offer it, there are online options for you as well. Basically, if you want to do it, you have options.
Does it cost you anything to do the loan?
Yes, but not much. You will probably have a loan processing fee(maybe $25-$100), and you will have some interest that is charged on the loan. For example, if you do a 1 year loan at 10% on the $500 and stick with the scheduled payments, your total interest charged will be $27.50. That isn’t bad if you’re improving your credit.
The payoff is your score will go up if you make each monthly payment on time. That part is critical. If you are late on any of these payments, this whole plan is shot and won’t do you any good. You MUST make your monthly payments on time, every month. The general rule of thumb is that 6 months of positive loan activity will boost your score. How much? Nobody can know for sure, but you should see the number go up. While carrying out this plan, make sure any other loans you have are paid on time as well. Payment history is the biggest slice of the credit score pie.
FYI, your bank may offer a cash-secured credit card option instead of a fixed loan. You can go either way. The credit card may cost you less out-of-pocket, so I’d look there first. The best way to use a card to build credit is to buy 1 small thing per month to generate a statement, pay the statement in full once you receive it, then repeat every month. This plan will minimize your cost for improving your credit score. You always need to consider how much a plan will benefit you versus how much it costs you. Following my guidelines here should be worth the cost. Why? Because boosting your credit score will save you hundreds or thousands of dollars in the long run because you will qualify for lower interest rates versus getting a higher rate because of a lower credit score. If you’re always servicing loans, you want to keep your score higher to reduce your out-of-pocket interest expense.
