I learned this technique for building a credit report 15 years ago when I was doing Credit Repair from a company in Florida that no longer exists. I have used it countless times. It works, it costs very little and has a marvelous impact on a credit report.This is not a tool for an immediate improvement to a credit file. This takes 6 to 12 months to have it’s full benefit. This technique is for clients who are determined to improve their situation and willing to work at it.
Cash Collateral Loans
They go by several names but, the details are simple. Rather than using the title to a car or a mobile home or real estate to secure this type of loan, the borrower uses cash. This may seem out-of-reach to a client with credit issues but it usually is not. Consider this; the borrower simply need to have access to some money for about 2 hours to make it work.
Step 1 — Find a local lender who allows these kind of loans. Just pick up the yellow pages and call the loan department of local banks and credit unions. I have found a lender to do these loans in each town where I tried. I always had better luck with small local banks and credit unions.
Step 2 — Borrow some money from somewhere. Maybe a family member, maybe an employer, just remember you only need it for about 2 hours and it will be paid back in full. Make the amount a substantial amount, but any amount will do. Try for $1500 or higher. You want as large a loan as possible to go on the books. For this example, lets use $2500.
Step 3 — Take your $2500 to the lender you found in step 1 and apply for a Cash Collateral Loan. The lender will take your $2500 and open a savings account to deposit the money into. This account will be locked. You will not be able to withdraw the money from it. At the same time the lender will issue you a new loan for $2500. The collateral for the new loan will be the cash you just deposited. With most lenders you can request that the payments be automatically deducted from the savings account. In some cases you will need to “prime” the account with one full payment. In other cases you will need to deposit the amount of interest that will be charged on the loan. In every case that I have seen, you will be paid interest on the savings account. Choose a term of 12 or 18 months.
Step 4 — Leave the bank with the $2500 proceeds from your new loan and pay back whoever you borrowed it from.
Step 5 — Go on about your life and let this little credit engine work it’s magic on your credit report. At the end of 12 months (for example) the loan will be paid off and the savings account will be empty. Your credit report will have an account showing a new loan with a perfect payment history.
The Details
You will have to fill out a short credit application, what is typically called a “5 Liner” (Name, Address, SSN, Birthdate and Employer). Your credit report will not be pulled (there is no need for this, you are paying the loan in full up front). Your income will not be verified (again, there is no need, all the payments are sitting in savings). The interest you earn on the savings account will offset the interest you pay on the loan. The interest rates you will pay on this type of loan is very reasonable. After all, it is a very safe loan for the bank. You should expect to pay between 7% and 8% on the loan and earn 2% to 3% on the savings account. Your interest rate">effective interest rate will be around 5% to 6%. That is a great rate for someone with credit needing improvement!
Make sure to account for the interest the loan will cost you. This is not a free loan. It is very cheap. This technique is very effective. It is not an overnight fix, it takes a little time. When you consider that it takes some time to mess up a credit report, it makes sense that it will take a little more time to get it back on track. This also works well for business that are trying to establish credit in a company name.
