How to Improve Your Credit Score With a Secured Loan

The effects of a poor credit rating stretch far beyond difficulty qualifying for new loans and lines of credit. Your ability to qualify for insurance, some forms of employment and housing all rest on your credit history. Even if you don't struggle with bad credit and simply want to give your credit score a boost, a secured loan can help you accomplish that goal. Because secured loans require collateral, they are less risky for lenders and easier for consumers to qualify for -- making a secured loan a clear benefit to those with imperfect credit histories.

Difficulty:

Moderate

Instructions

1. Purchase your FICO scores. Your lender will evaluate your FICO scores when you apply for a secured loan. Purchasing your scores yourself helps you see where you stand ahead of time. You can buy your FICO credit scores directly from the Fair Isaac Corp. through the company's website, myFICO.com.

2. Call the banks and credit unions in your area that offer secured loans. Ask about the institution's credit and income requirements. Compare these requirements to your own income and FICO scores before you apply. Make a list of potential lenders most likely to approve your secured loan application based on your income and credit history.

3. Apply for a secured loan with each of the financial institutions on your list. After evaluating your application, each company will inform you of the interest rate you qualify for and the terms of the loan. Compare the different loan products and select one that carries a reasonable interest rate and repayment terms that fit your budget.

4. Pay down your credit card debt with the loan funds. A portion of your credit score rests on how high of a balance you carry in relation to the spending limit on each card. The lower your credit card balances, the higher your credit rating.

5. Pay off any collection accounts on your credit report with any remaining loan funds. Although paying collection accounts neither positively or negatively affects your scores, paid debts make you appear more responsible than unpaid collections.

6. Repay your secured loan over time. The very fact that you have a secured loan helps your credit because the types of debt you carry account for 10 percent of your overall credit score. Lenders want to see that you have experience managing a variety of different debts. In addition, each time you make a payment on the loan, your lender updates the loan's status on your credit report. More recent activity carries a greater weight with the scoring system that old entries. Thus, each time you make a timely payment your credit report will reflect the payment and your credit rating will benefit.

Tips & Warnings

• If you cannot qualify for a secured loan, ask a loved one with good credit to co-sign with you for the loan. Remember, if you do not repay the loan, your lender can pursue your co-signer for the debt.

• Setting up automated payments through the bank gives your lender the ability to deduct your loan payment directly from your checking account each month. This ensures that you never miss a payment and inadvertently damage your credit even further.

• You don't have to own a home to take out a secured loan. Banks and credit unions often accept other forms of collateral such as your car title or stocks and bonds you hold.

• If you purchase your credit scores through the credit bureaus or a third-party score provider, you will receive a consumer credit score, VantageScore or estimated credit score. These are not the same as FICO scores and do not help you determine your eligibility for a secured loan.

• You can purchase your FICO score only for your Equifax and TransUnion credit reports. Experian does not permit consumers to purchase FICO scores based on its credit data.

References

• Bankrate.com; Commercial Paper Risks Are Real; Don Taylor
• ConsumerReports.org; Credit Scores -- Which Ones Do Lenders Use?; June 2009
• Experian; Is it Better to Pay Off One Credit Card or Reduce the Balance on Two?; Maxine Sweet; April 2010
• MyFICO.com: What's in Your FICO Score
• MSN Money: Credit Bureau Move Creates 'Secret' Scores; Liz Pulliam Weston

Resources

• Federal Reserve Board; Improving Your Credit Score; June 2010
• Federal Trade Commission; Credit Repair -- How to Help Yourself; October 2008