DHK

Make Money, (re)Build credit and build your savings accounts

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DHK? How did it work for you?

I'm not doing this right now for myself. I am recommending the strategy for all credit-impaired clients that I have.

One of the best ways to improve credit is new positive tradelines reporting - no matter the type: store, charge, credit, revolving, installment, etc. No matter what it is, new tradelines help to counter-balance the effect of old bad tradelines. It's like "flushing out cancer."

Now, if you have a score of about 680, would this work to bring you over 700? I doubt it. This is for BUILDING credit from previously damaged credit, but not a great ENHANCEMENT to currently good credit.

The fact is, is that most people think that they are now subject to endless hell of fees to re-establish ANY kind of credit (cross country bank or First Premier come to mind). This is a way that is MORE financially sound, and LESS costly than those other methods.

Just my opinion.

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Bank of America is currently doing a 0 debt consolidation loan for credit cards. You can apply from $5000-$25,000 unsecured loan with a APR which varies from 8.99-21.99 (depending on your creditworthiness). I have been holding onto this application I received in the mail, but I'm hesitant on applying for a loan because of my 3 baddies ( 2 loans from 2 years ago, old credit card account). My credit scores are 640+; should I try for it? Or just wait until I have other things taken care of (the baddies)?

I like the fact that BoA will put the money right into your checking account, and you can use it for other purposes. I was going to put $1000 into my 5.05% savings account with Emigrant Direct, $1000 into a CD (5.10% from Emigrant Direct), and the rest into my personal savings to pay the payments when they start.

They also defer your payments for 3 months after you've received the money, but you incur interest though.

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Right after my bk I did basically what the OP suggests with a view to re-establish credit. I took out a $3500 personal loan from a local bank, but only had to secure it with a $2000 CD. I made timely payments for a year, then paid it off. I earned interest on the CD and put all the money into a savings account which also earned interest. I had the payments for the loan come directly out of the savings account.

-r

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Should I try for it? Or just wait until I have other things taken care of (the baddies)?

Sure, give it a try? Why not?

-r

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Ah, I gave it a shot, but I was turned down. :( I'm sure it's because of the baddies on my CR's. Welp. I'll just have to clean it up, and maybe try for something in about 6-10 months. Well, at least I did get my Hooter's card approved.

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In my study of credit rebuild, it is good to have a variety of credit.

You should have one or two installment loans, and some revolving accounts.

Installment loans increases your score over revolving accounts, because your installment loans have fixed monthly required payments, i.e, $5000 borrowed would be $100 monthly repayment until the loan is paid. Your revolving accounts are simply that, once you pay your credit cards down to a zero balance you can start all over again utilizing the CL again.

I disagree;

Installment loans increase your monthly payment obligation, some lenders frown on this, while a mortgage can improve your credit it also increases your monthly payments, but unlike an installment loan mortgages are a good sign of stability. Revolving credit is affected by utilization which means if you have 20K of available credit and you're only using 1% it will positively boost your scores, (high limit revolving accounts are also favorable) Where as if you have an installment account (say an autoloan) for 20K if 19K owed this isn't going to increase your score over the 20K revolving TL.

FICO is very unpredictable as many of us know.

However the advice to have one or two installment loans over revolving accounts to boost scores is anything but solid or accurate. IMO.

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Here are the main benefits of this type of plan that I can see:

1. No credit checks!

2. No new credit CARDS (great plan for the less-disciplined - like me!)

3. No annual fees!

4. No declines!

5. Can earn interest on borrowed funds

6. Or, you pay very little interest on the funds borrowed

7. New tradelines established for higher loan amounts (Credit report will show that you have repaid a $25k loan within 6 months; MAY be approved for higher CL's than you would otherwise.)

8. Can continue to build your CD account with more contributions (DCU feature)

9. Build a solid financial future by leveraging your growing financial assets

10. ANYONE can do it - scores of 350+ can and will be approved!!!

Here's my math on a sample loan of $1,000 for 6 months:

CD earns: 2.32% or $11.60 EARNED

Loan cost (2.5% above CD rate): $11.60 + $12.50 = $24.10 PAID

ING earns 2.6% on $1,000: $13.00 EARNED

So take your earnings total: $24.60 and subtract your loan COST of $24.10 and you MADE $.50.

Granted, you're not going to get rich doing this, but you can at least not PAY interest while building your credit.

If ING is going to report the interest earned to the IRS, then you have to remember to figure in the loss due to taxes. You earned $13 from ING. Subtract about $3 for taxes, and now you have lost $2.50 on the whole ordeal.

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I believe they do a "soft-pull" from TransUnion.

It's been over a month since I opened mine and I haven't seen any pulls on any reports, hard or soft.

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"At ING Direct, we take security very seriously and are committed to protecting you from identity theft. As part of our identity verification process, we ask that you answer the questions below. Please note: We do not pull your credit report as part of this process."

This is what is at the top of my ING account.

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Here's my math on a sample loan of $1,000 for 6 months:

CD earns: 2.32% or $11.60 EARNED

Loan cost (2.5% above CD rate): $11.60 + $12.50 = $24.10 PAID

ING earns 2.6% on $1,000: $13.00 EARNED

So take your earnings total: $24.60 and subtract your loan COST of $24.10 and you MADE $.50.

I know this is an old post, but I thought I'd throw my thoughts/questions in here since it's been revived. I get the concept and follow most of the logic. My concern is in regards to the interest earned on the savings account. If this is the money that you are using to pay the loan back, then you are not going to be getting 2.6% on the full $1000, right? I'm no math wiz, but here's my reasoning.

If we follow this plan and pay back $500 the first month, then $100 each month after, then your savings account balance will be decreasing every month, thus the interest earned will also decrease. So if you made your loan payment on the last day of each month (allowing for maximum interest earned on your savings), your interest earned at the end of each month would be 2.17, 1.09, 0.87, 0.65, 0.43, & 0.28, totalling $5.49 in interest in earned. Keep in mind my numbers do not factor interest earned on the interest re-invested, so the number will be slightly higher, but no where near the $13.00 suggested. In the above scenario, you'll actually lose around $7.00. Now, that may still be acceptable to someone wishing to use this method, I just felt it important to point out my concerns regarding the accuracy of the sample numbers. I don't believe the OP intended to mislead anyone, my guess is it was just an oversight.

I do want to reiterate that I'm no financial guru, and I could be misunderstanding how interest works. If that's the case, please offer any corrections, because I certainly would like to understand this stuff better than I do now.

It is still an intriguing subject, and I'll be looking more into the benefits. Thanks for the post.

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There should be a little orange and white box very little right next to the entry on the forums page. I wish I could just show you, its hard to describe.

Let me try again. When you are on the main forums page and the entries say things like "Last one to Post Wins", there is a little orange and white box in front of the words "last one to post" ... if you click on that box it will take you right to the last post that you have read. Not exactly to the very end of the thread, but close enough that you can see all that has gone on for a while.

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Well, your approach is really interesting. To tell you the truth, I have never thought about this. I think, it's really worth trying and I will definitely keep it in mind. Thank you!

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On 2/12/2009 at 7:03 AM, jestor151 said:

I know this is an old post, but I thought I'd throw my thoughts/questions in here since it's been revived. I get the concept and follow most of the logic. My concern is in regards to the interest earned on the savings account. If this is the money that you are using to pay the loan back, then you are not going to be getting 2.6% on the full $1000, right? I'm no math wiz, but here's my reasoning.

If we follow this plan and pay back $500 the first month, then $100 each month after, then your savings account balance will be decreasing every month, thus the interest earned will also decrease. So if you made your loan payment on the last day of each month (allowing for maximum interest earned on your savings), your interest earned at the end of each month would be 2.17, 1.09, 0.87, 0.65, 0.43, & 0.28, totalling $5.49 in interest in earned. Keep in mind my numbers do not factor interest earned on the interest re-invested, so the number will be slightly higher, but no where near the $13.00 suggested. In the above scenario, you'll actually lose around $7.00. Now, that may still be acceptable to someone wishing to use this method, I just felt it important to point out my concerns regarding the accuracy of the sample numbers. I don't believe the OP intended to mislead anyone, my guess is it was just an oversight.

I do want to reiterate that I'm no financial guru, and I could be misunderstanding how interest works. If that's the case, please offer any corrections, because I certainly would like to understand this stuff better than I do now.

It is still an intriguing subject, and I'll be looking more into the benefits. Thanks for the post.

This is an OLD post... but I'm here to revisit the topic.

First, you're correct.  Due to repaying principal, the amount of interest earned will decline.

Second, let's talk about taxes on interest.  Lots of different numbers floating around about how to estimate taxes in this thread.

Interest earned is taxed as ordinary income - just like money you earn at your job.  However, we live in a tiered income tax society.  Let's take a look at the different tiers for 2016:

Married Filing Jointly in 2016:

$0 - $18,550 = 10% bracket

$18,550 - $75,300 = 15% bracket

$75,300 - $151,900 = 25% bracket

$151,900 - $231,450 = 28% bracket

$231,450 - $413,350 = 33% bracket

$413,350 - $466,950 = 35% bracket

$466,950+ = 39.6% bracket

http://www.cffpinfo.com/annual-limits/

 

Now, interest is added on top of whatever other income you have after your deductions.  If you have $100,000 NET household income, add your interest earnings on top of it for you to be in the 25% bracket.  That would mean, without factoring anything else of your tax situation, you would have to pay a tax of 25% on all your interest earnings.

The bigger question on this strategy isn't "how much is it going to cost me to rebuild my credit?".  

The real question is "How well will this work compared to other offers?"

 

This is just ONE way to approach the subject.  And I'd rather earn taxable interest (which may be MORE than offset with other tax credits and deductions) than pay high after-tax fees out of my income... but maybe that's just me?

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