Can I Take Out a Loan I Can Easily Pay Back to Improve My Credit Score?

Many people wonder if taking out a loan they can easily pay back can help boost their credit score. This article explores whether this method is effective and safe, focusing on the 'Installment Loan Hack' and offering tips on how to improve credit scores through responsible borrowing.

What Methods Can I Use to Improve My Credit?

Several methods can help improve your credit score, including using credit cards from department stores and gas cards. However, it's important to use these tools responsibly to avoid overextending yourself. Generally, experts recommend having a mix of installment and revolving credit on your credit reports. Key things to remember are:

Know your credit limits for each creditor. Avoid exceeding 30% of your credit limit at any time. Make all payments on time.

For example, if your Macy’s credit limit is $600, maintain a balance no higher than $200. If the limit is $900, keep your balance no more than $300. These strategies can help maintain a healthy credit utilization ratio, which is a significant factor in credit scores.

Can I Take Out a Loan to Increase My Credit Score?

Yes, you can take out a loan to improve your credit score, but it may not be worth the effort. A common technique is known as the 'Installment Loan Hack.' This method can potentially increase your FICO Score by approximately 25 points, but it depends on the cleanliness of your credit report.

The Installment Loan Hack

To understand the Installment Loan Hack, consider the following steps:

Take out an installment loan of a significant amount (for example, $1000). As soon as it's reported to the credit bureaus, pay off all but $100 of the loan. Enjoy a score increase as the payment becomes a positive factor on your credit report. Gradually pay off the remaining balance over time, until the loan is almost at the end of its term. Once the final payment is due and the loan is closed, you may lose some of the initial point gain, but retain a few points.

The key to this hack is maintaining an installment loan that is still reporting to the credit bureaus but is near full payment. This strategy helps keep the loan on your credit report and continues to contribute positively to your score.

Is There a Financial Benefit?

While the 25-point increase in scores might seem significant, the financial benefit is often minimal. In most cases, a 25-point increase doesn't substantially impact your credit worthiness. Creditors primarily focus on the raw data from the credit bureaus, the information you provide on credit applications, and their existing knowledge about you to make approval decisions. Your credit score only comes into play after your application is approved, to determine conditions such as the Annual Percentage Rate (APR) and, in rare cases, the credit limit.

People with FICO scores as low as 650 can get approved for credit and find themselves in the same position as those with perfect scores in terms of approval. Conversely, very high scores do not guarantee approval, as lenders often accept risks associated with slightly lower scores, provided the borrower is deemed worthy in other aspects.

Conclusion

Improving your credit score through responsible borrowing is a complex process. While taking out a loan you can repay may help, the financial benefits are often negligible. It's crucial to maintain a healthy credit profile by using credit within limits, paying bills on time, and keeping a good mix of credit types. If you're considering the Installment Loan Hack, carefully weigh the potential benefits against the risks and your overall financial goals.