Building Credit – Credit Union Hack
I have covered this hack and others in an early article but thought I would stress this hack again in a post just for itself.
Having the best credit possible is the only way you will be able to achieve the American dream of homeownership. It is critical to keep an eye on your report and scores. One way is through the actual FICO score site. You do not want to depend on sites like Credit Karma.
Credit Union Hack
I read about this hack over 5 years ago from a real estate investment book. I found this secret to be quite fascinating.
It was a few years later before I actually would put it to the test. I thought it would have to be something I would have to keep on the down low. After doing some research I realized that banks encouraged this type of endeavor. They fully understand what I was actually doing.
After doing my research in the Las Vegas market I found that America’s First Credit Union had the best process for this hack.
The First Step
You will need the $1,000 plus a little extra to do this technique. I am going to assume that at the moment you have access to $1,000. If not, we will discuss that later.
You need to talk with one of the desk representatives for all steps of this process.
When you are sitting with the representative you will say you want to open a Secured Savings Account for $1,000. This is a savings account that you cannot pull the money out. It is secured.
The good thing is that since it is “secured” you can use that account as collateral.
The Second Step
While sitting with that banker the next thing you will want to do is to ask for an installment loan of $1,000 (or lower if you don’t have extra money) using the secured savings account as your collateral. Make this loan for at least 18 months, preferably 24 months.
The interest rate that I have seen at America’s First Credit Union is around 3% above what a savings account will give to you. Thus, you can expect something around 3.1% interest.
This step may take a business day to process since it is a new loan. However, you should be approved. When you get approved you will need to follow the third and last step.
To me, this is the most important one of them all to get the best results.
The Final Step
When you are signing the loan documents you want to ask the banker two very important questions.
The first question is, “How much interest will I be paying over the course of the loan?”
The second question is, “What is my monthly payment?”
When he gives you those numbers add $10 to the higher of the two (which is most likely the amount of interest you will be paying) and deposit that into the secured savings account.
You then ask the banker to have your loan automatically be paid from the savings account.
Make sure your payment is on or before the 25th of the month to avoid any issues with short months like February and to ensure that funds will clear if the 28th of February is a Sunday.
By adding those extra funds to your account you have just prepaid the entire interest for the two years of the loan.
At the end of the two years, you should have about $10 in the account. The reason for the $10 is to account for any math errors or other unexpected incidentals.
Your Monthly Chore
You do have a chore you must do every month. It will take about 15 to 30 seconds.
You will get your statement on a monthly basis. You simply open it up and look at two numbers. The first is the amount of money in the savings account. The second is the balance of the loan.
Your only task is to ensure the first number is greater than the second. Since you prepaid the interest already this should always be true. But, you are only verifying it.
I Don’t Have the $1,000
What if you don’t have the initial $1,000. The answer to that may be simpler than you think.
Do you know anyone who has a $1,000 they can loan you for 24 hours? What if they were to come with you to the bank and both of you go on the loan?
All you need is the amount to cover the interest.
Will This Hurt My Credit?
At the beginning, it will hurt your credit. However, the middle and longer-term events will actually help you build credit.
When you start the process you will have a “ding” on your credit from the inquiry on your credit to check your credit. The second “ding” comes when you get approved for the loan and now you have a brand new loan on your account with no history.
However, after a few payments (all of them on time since they are auto-deducted from your secured savings account) your history will show on-time payments and your score will slowly go up.
Six to twelve months will see better and better improvements. After 24 months you will have a permanent record of a paid-off installment loan.
To learn more about the difference between installment loans and revolving loans read here.
A good idea is to keep this going for multiple years. Once one installment loan is paid off just refund the secured savings account again and get a new installment loan. This can continue for a lifetime.
You can also do this with your children as you can sign on their behalf when they are young or they can sign once they turn 18.
Word of Caution
The Final Step mentioned above is critical. You do not want to get the bill every month and pay it with a check or bill pay. The reason is that if you are ever late, then this has destroyed the entire reason you set this up in the first place.
If the interest is too much at $1,000 then go for a lower amount like $800 or $600. You want to be cautious about going too low as at some point it becomes pointless to do this process.
This technique is a hack that you can do multiple times and even do multiple of them at the same time. The whole concept is to build credit by establishing new good tradelines rather than always focusing on removing old negative tradelines.