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“A Frugal Way to Increase your FICO Credit Scorein Our Technology Transformational Economy”
Hey There,
I am so glad you here, can you believe we are in the age of transformational technology?
Our technology i.e., apps, software, internet, smartphones, advancements in AI (don’t worry it is still in the early, early stages-think Alexa – Amazon Echo) is literally changing the way society does business, communicates, manufactures goods.
It is transforming retail, influences how we make purchases and is opening up new opportunities to make and create money while at the same time it is replacing many human jobs with an app, AI or software.
We live in very exciting and at times uncertain times. However the picture is getting clearer as we we get we begin to understand our growing knowledge based economy.
So lets talk about the things we can start influencing and controlling like our credit scores.
I am so excited about this topic because it is definitely the one area I was majoring failing in my whole adult life up until up to a year ago when I learned how it works in our growing knowledge economy.
A Bit of History First
As many of you may remember 2007 was the beginning of the house market crash.
If you don’t remember, that is ok. The “in a nutshell version” is basically loan companies were offering bad loan deals to home buyers.
They were offered a concept called a balloon payment usually a tactic reserved to Real-Estate developers who have an easier time rebounding from the larger balloon payment down the road because after the building is finished being built they gain revenue from renting out industrial or retail space.
This tactic used on home buyer caused many to lose their homes, lowering the value of whole neighborhoods and a lot of people walking away from their homes to buy a cheaper one next door.
Another problem that contributed to people losing and walking away from their homes was the many had a non-fixed interest rate. So if the payment went up later it had the potential to financially overburden the buyer.
The above is just a small peak inside towards what has brought us to here but the story about better explains the current credit issues and how to build credit.
We live in very exciting and at times uncertain times. However the picture is getting clearer as we we get we begin to understand our growing knowledge based economy.
It’s little more involved than that but what is important to understand is that before the crash people spend credit like crazy or at least that is what we were taught to believe.
The middle class was taught to throw their credit card debits on top of their mortgage borrowing against the equity of the home every year. This tactic would lower their immediate monthly bills since their house payment would be much cheaper broken down into monthly payments on a mortgage that is 10-20-30 year.
Although the monthly payments would be cheaper than paying a mortgage and credit card bills with the compound interest on a mortgage, they were paying much more in the long run.
Either way that was not the mindset. The mindset was not worried about paying more money in the long run; it was more concerned with lower, affordable monthly payments so one could better afford a lifestyle they wanted without the immediate cash to buy it.
As long as you kept working,
you were basically fine.
However, since the housing market crash lenders are more cautious in loaning money and authorizing credit increases.
So Now the Rules are NOT “Keep Spending.”
BUT, “Show us you can control your spending and make multiple payments on time and then we will trust you with higher credit limits.”
Take Out a Secured Bank or Credit Union Loan.
I took out a $300 (minimum) secured credit building loan at UME Credit Union a couple of years ago.
They are a conservative credit union, but once you answer their questions and qualify for the loan, it is very easy. And a nice feature is the option of automatic payments.
They also allow you to create savings and checking accounts onlines as well as borrow online too.
A Word of Wisdom:
when you receive your loan money I highly suggest you leave the money you have borrowed in the savings or checking account you plan to have your monthly payments deducted from.
This way you do not have to think about the payments, or if you have a tight month, you do not have to worry about not having the payment.
Just leave it in the bank, and in two years you will have $300 minus the interest of the loan plus the interest earned from the savings account waiting for you. “Nice little perk of waiting.”
Another Payment Strategy:
As you make payments your creditor may release the secured deposit funds of equal value back into your debit (savings or checking) account.
If so, then if you wanted to, realistically, you could use your those funds to pay the next month automatic payments. You could do this every month until you are done with your loan contract.
For Example,
Let’s say your monthly payments is $15.
After your first month payment, you of $15 your bank/credit union will releases $15 of your secured loan deposit back into the debt (savings or checking) account you used to make your automatic secured loan payment.
Then you leave that just released secure loan deposit money in the account so the bank can use that money for your next payment.
You can repeat that process every month until your loan is paid in full.
Why Use this alternative payment method?
Great Question!
The first reason is so if you need to borrow $250 towards the secure loan deposit you can pay the person or persons back right away with the loan money given to you by the bank/credit union.
I suggest borrowing no more than $250 from friends/family so you can contribute $50 of the $300 to your savings or checking account to have more than enough in your account to cover the first month payment plus two years of interest.
Don’t worry you should have money left over from the $50 out of your pocket.
So, if your bank or credit union does, in fact, practices releasing your secured loan funds back into your account as you make your payments (see example above), which they usually do.
My second suggestion is consider leaving your first month payment plus total interest owed at the end of your loan agreement in the account your payments will be withdrawn from. As I mentioned before $50 should be safee.
Ask the loan agent how much your total will be at the end of the contract so you for sure have enough in your account to cover all monies owed.
Then transfer the rest of the borrowed money, let’s say for example $250 into a high yield online savings account like marcus.com owed by Goldman Sachs. At the time of this writing, the APY for marcus.com is at 2.65%.
This Strategy Gives You Two Things:
One – it gets you into the habit of saving.
Two– it will help you increase your money from the interest from saving.
So 2.65% on 250 for 12 months would be a profit of $6.62 not bad and might even help you counter-gain some of the interest paid on your secured bank or credit union loan.
I think my secured credit union loan was about 2% or 3%.
Benefits
Having a loan from a bank or credit union even a secured loan looks great to credit lenders and will help to start increasing your FICO score.
You will want the loan agreement to last at least two years and will start seeing an improvement in your credit score within the first 3-6 months of making payments.
The nice thing about credit unions is the interest rate is usually much lower than traditional banks, and with a smaller loan of $300 with 24 months of payments, I think my payments were a around over $12.50 a month.
Last word of advise if they loan company is not sure how you will pay back your loan assure them that the loan is for building credit and you will pay the loan back with the loan money or mention the $50 and using the month released deposit to pay back the loan.
Either way explain to them one of the above tactics for paying back your loan. It should satisfy their concern.
Then without fail make your payments every month on time, which is easy as long as you do not touch the monies in your acct.
So that is just one inexpensive way to build credit and increase your FICO Score and other fun living skills please follow us on Pinterest or subscribe to our blog below.
Very interesting take on how to improve credit. And I like the in-depth discussion you have here.
Thank you, Mary!!
Wow! Such an amazing and helpful post this is. I really really love it.
Thank you!!