Author Topic: Should I take out a small car loan just to boost credit score?  (Read 32556 times)

Dicey

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When my company scrapped the company car program, I bought my old company car and wrote a check. My credit union is now offering used car loans for 1.99%. I'm debating whether I should borrow against my paid-for car at that low rate. I have two mortgages (two houses), 18 month EF, 401K, Roth and no other debt. I use my CC's sparingly and pay off every month. Hard to imagine any other scenario that would include installment-type debt. I'm thinking of borrowing say, 3K, parking it at same credit union and auto-paying it off in 12 months. Would it make much difference on my credit report? Seems like it could be worth it for better credit scores, which are currently high sevens/low eights. Any thoughts? Can't really think of any other way to boost my scores.

herisff

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Re: Should I take out a small car loan just to boost credit score?
« Reply #1 on: April 22, 2012, 07:14:53 AM »
Why would you want to pay interest? And I doubt that the CU would give you a loan for a car that you already own and have paid for. You already have 2 mortgages - that's enough to tell the credit bureaus that you can handle installment debt responsibly. The best thing to do, in my opinion, is to simply pay your bills on time. Timely payment is around 30% of your credit score. With a score close to 800, I doubt it would make any difference in the interest rate you would be offered. I suggest you read Liz Pulliam Weston's "Your Credit Score" for more information.

Dicey

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Re: Should I take out a small car loan just to boost credit score?
« Reply #2 on: April 22, 2012, 09:16:12 AM »
I would "want" to pay interest *only* to boost my credit score. A car loan is a different type of loan than a mortgage or credit cards. Sorry if I was unclear: I AM pre-approved at my Credit Union to borrow against my own car, in exchange for the pink slip. The loan as outlined would cost around $60.
For comparison, note that the majority of 0% credit card balance transfer promotions carry a 3% "fine print" up-front processing fee, though few seem to recognize that as interest and I don't have any balances to transfer anyway.

So another way to ask my question is: "Would this be a cost-effective way to improve my credit score and would it work?" I am in my early fifties and have been paying bills in a timely manner all my life. I feel I have reached a ceiling of sorts. Is this a way to break through it? This is not a Finance 101 question, which is why I'm seeking advice from the pool of Black Belt Moustachians here.

PS- I have been reading LPW since her early LA Times days, before blogging existed. Yeah, I'm that old and so is she.
PPS - Any financial institution will lend money against a pink slip, as long as the vehicle's value is more than the loan amount, at a rate determined in part by the borrower's creditworthiness. Finance 101.

icefr

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Re: Should I take out a small car loan just to boost credit score?
« Reply #3 on: April 22, 2012, 10:34:01 AM »
I took out a small car loan to boost my credit rating and auto-paid it out of a savings account. My credit history was *empty*. If your credit scores are already in the high 700s/low 800s and you already have two mortgages, I don't see how taking out a car loan would help you. It would just cost you the interest.

DB

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Re: Should I take out a small car loan just to boost credit score?
« Reply #4 on: April 22, 2012, 01:08:29 PM »
You can earn at least 0.84% interest in an online savings account from Ally, which will offset some of the loan cost.  Also, the loan would not cost $60 anyway, unless that includes some up front fees.  You won't be paying interest on the full $3000 for the full year.  The actual interest cost would be about $32.44 before you even consider the small income you get by putting the $3000 in savings.  If you have no other non-mortgage installment loans on your credit history, I would do it.  I would look at it as a gamble.  There is a chance you spend less than $30 and get no benefit.  There is a chance it increases your score and you save much more than $30 on your next mortgage or other loan.  That is a risk I'd be happy to take.  Of course, if you don't intend to borrow money for anything else in the next several years, there really isn't any upside to having a higher credit score.

Rich M

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Re: Should I take out a small car loan just to boost credit score?
« Reply #5 on: April 22, 2012, 07:09:24 PM »
Does high seven low eight mean high seven hundreds low eight hundreds?  If so, what is wrong with that?  Is there some contest to have the highest credit score?

Seems to me credit scores matter the most to people who have low scores and have to make small payments.  They get reamed by high interest on loans they cannot pay off quickly.

If you get a car loan, all you do is add to a utilization ratio which might actually lower a score.  If you pay your bills on time, to increase your credit score you might need a line of credit or more credit cards with high limits you never use to decrease your utilization ratio

« Last Edit: April 22, 2012, 07:12:28 PM by Rich M »

Dicey

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Re: Should I take out a small car loan just to boost credit score?
« Reply #6 on: April 22, 2012, 10:44:37 PM »
DB - Thanks for the Black-Belt answer. I agree that there isn't a large amount of upside, but the best time to improve your credit score is when you don't need credit, no? Maximizing my score enhances my sense of financial well-being and optimism. Sure, it would be great if I never needed to borrow money again, but that's unrealistic. In a way, it's like purchasing insurance against a possible future need. Should I find myself in a position of needing cash, I can be assured of not paying through the nose to get it. Thank you for helping me think it through. I'll make a decision this week and post the results.

gooki

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Re: Should I take out a small car loan just to boost credit score?
« Reply #7 on: April 22, 2012, 10:51:55 PM »
WTF is peoples obsession with their credit score - why do you care? Are you planning to take out a major loan in the next three years, is your current one rubbish?

If not, put this "manipulating my credit score crap" in the wooden chest at the back of you mind close the padlock and throw away the key.

The best thing you can do is pay down you current debts, not take on more.
« Last Edit: April 22, 2012, 10:56:45 PM by gooki »

gooki

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Re: Should I take out a small car loan just to boost credit score?
« Reply #8 on: April 22, 2012, 10:54:31 PM »
Maximizing my score enhances my sense of financial well-being and optimism.

FFS. Find something else to boost your financial well being - like saving money for financial independence.

arebelspy

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Re: Should I take out a small car loan just to boost credit score?
« Reply #9 on: April 23, 2012, 08:06:47 AM »
WTF is peoples obsession with their credit score - why do you care? Are you planning to take out a major loan in the next three years, is your current one rubbish?

Because of the thousands of dollars it can save you or make you.

Small example: Right now lots of people are complaining about trying to get loans for housing, that the credit markets are tight.  Despite that, of the 5 houses I've purchased in the last few years, I've got loans on three of them due to my excellent credit scores. (The other two were purchased with cash.)  Just like cash gives you opportunities, so does good credit, by giving you access to leverage and other people's money.   It's not for everyone, but it can be advantageous if you are smart about it.

I don't "obsess" about it.  In fact, I've never done anything to actively say "this will boost my credit score" that I wasn't doing otherwise.  However I wouldn't do something that would hurt my score, because I actively use it to make me money.
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Dicey

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Re: Should I take out a small car loan just to boost credit score?
« Reply #10 on: April 23, 2012, 12:51:07 PM »
Hi Gooki - Before you take such a sharp tone - which you're perfectly entitled to do - consider reading the question thoroughly. I posted this question hoping for thought-provoking responses from some MM heavy hitters. DB and arebelspy made me think and were helpful. Yours missed the mark completely, but thanks for trying.

velocistar237

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Re: Should I take out a small car loan just to boost credit score?
« Reply #11 on: April 23, 2012, 01:11:16 PM »
My understanding is that a score of 850 doesn't get you much more than a score of 750 does. I would pay more attention to what you can do with a free $3K. If your tax-adjusted mortgage interest rates are higher than 1.99%, then take out the car loan and put the $3K into a mortgage. Pay the $3K back over the longest possible term so you can keep focusing on the more expensive debt.

http://badmoneyadvice.com/2010/03/the-truth-about-mortgages.html

I just borrowed $8K at 2.5% to buy a car. Because I didn't sink that $8K into the car, I have money to pay down more expensive school debt, or even my 3.75% mortgage. When I finish paying off the higher-interest debt, I'll pay off the car loan.

gooki

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Re: Should I take out a small car loan just to boost credit score?
« Reply #12 on: April 23, 2012, 02:57:05 PM »
Where ever I see something that screams addiction I get on my tough love horse. And for me it seemed you were addicted to debt/your credit score.

Can you provide one scenario where your current credit rating is insufficient?

And as others have mentioned, just parking the money in a cash account is foolish when you have higher interest debts. And the effect of borrowing $3k is likely to have zero effect on your credit score when you have much larger debts that still require servicing.

AJ

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Re: Should I take out a small car loan just to boost credit score?
« Reply #13 on: April 23, 2012, 03:22:35 PM »
My understanding is that a score of 850 doesn't get you much more than a score of 750 does. I would pay more attention to what you can do with a free $3K.

This. If your score is already in the high 700s, it won't pay anything to make it better - you already qualify for the best rate tier. However, there may be advantages to borrowing at a low rate and investing at a higher one. To answer your original question: yes, it will help your score if you currently have no non-mortgage installment loans on your CB. Types of credit is an important factor. No one will be able to tell you exactly how much it will help, though.

And I doubt that the CU would give you a loan for a car that you already own and have paid for.

It is not uncommon to loan money against a paid-for car. If you think about it, why would it be any different than a regular purchase or refinance as long as the collateral is acceptable to the lender and the borrower qualifies?

velocistar237

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Re: Should I take out a small car loan just to boost credit score?
« Reply #14 on: April 23, 2012, 03:44:45 PM »
It is not uncommon to loan money against a paid-for car. If you think about it, why would it be any different than a regular purchase or refinance as long as the collateral is acceptable to the lender and the borrower qualifies?

Search Google for "vehicle equity loan," and you'll get a bunch of payday-type loan sites. I'm guessing people generally don't borrow against their car unless they're in trouble.

wilk916

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Re: Should I take out a small car loan just to boost credit score?
« Reply #15 on: April 23, 2012, 04:01:16 PM »
I just borrowed $8K at 2.5% to buy a car. Because I didn't sink that $8K into the car, I have money to pay down more expensive school debt, or even my 3.75% mortgage. When I finish paying off the higher-interest debt, I'll pay off the car loan.

I have done this a number of times with our student loan debt (very close to having all our debt under 3.875%).  In this economic climate I'm all for borrowing cheap money to pay off expensive money when the opportunity arises.  This sounds like one of those opportunities.

AJ

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Re: Should I take out a small car loan just to boost credit score?
« Reply #16 on: April 23, 2012, 05:10:46 PM »
It is not uncommon to loan money against a paid-for car. If you think about it, why would it be any different than a regular purchase or refinance as long as the collateral is acceptable to the lender and the borrower qualifies?

Search Google for "vehicle equity loan," and you'll get a bunch of payday-type loan sites. I'm guessing people generally don't borrow against their car unless they're in trouble.

That is probably true, but most people don't know they can borrow against their car at a regular bank. Then again, most people with cars that would qualify probably already have a loan on it from its purchase. The type of folks I know that pay off their car loans early are the same folks that wouldn't actively go looking for money to borrow.

Dicey

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Re: Should I take out a small car loan just to boost credit score?
« Reply #17 on: April 23, 2012, 08:27:07 PM »
Okay Gooki, just for fun, I'll give you a little more background, mostly because your comments amuse me. While you're whiffing balls, a number of others have made comments that are quite helpful.

My brother and I had a conversation recently about credit scores. I have no particular interest in them, except as it applies to mortgage debt. As mortgage rates change over the years, what once was a great rate is no longer. I have lowered my mortgage rate significantly as rates dropped, primarily because of my high credit score, high savings and LACK OF CONSUMER DEBT. I only know my credit scores because I did a re-fi on my house last year to get my rate below 4%.

When my brother showed me his credit scores, I wondered why his were so much higher. The only reason    we could figure is that he's been buying cars with loans all the years that I was happily driving a company car. That's where the seed was planted. Then I stopped by my credit union with a deposit check from my new tenant, and they mentioned the 1.99% car loan. Yeah, when you clearly don't need the money, they want to give you lots of it.

I'm a fairly die-hard non-consumerist, so there are not many chances to improve my score. This just seemed like it might present a decent cost-benefit ratio. This is PhD level Moustachianism, which is why I posted my question here.

Yes, I am aware that your house is paid off - many kudos to you, but our situations are different - mortgage payoff is not my immediate goal.

Other than a touch of occasional sibling rivalry, I believe I have my "addictions" under control. I do appreciate your willingness to administer "tough love" but don't see how it's germane to the question.

smedleyb

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Re: Should I take out a small car loan just to boost credit score?
« Reply #18 on: April 23, 2012, 08:45:08 PM »
Diane,

Credit mix -- or the types of credit used -- accounts for roughly 10% of your credit score.  Based on that, the terms of your used car loan, and your intention to pay it back in a year, I think it's worth the risk to effect a modest credit score bump.


gooki

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Re: Should I take out a small car loan just to boost credit score?
« Reply #19 on: April 23, 2012, 09:50:28 PM »
mortgage payoff is not my immediate goal.

If you don;t mind me asking, what is your immediate goal?

Dicey

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Re: Should I take out a small car loan just to boost credit score?
« Reply #20 on: April 23, 2012, 11:05:23 PM »
Dear Gooki,
The company car went away is because the job went away. Fortunately, I was given a position in another division and was able to purchase said vehicle (in cash) for a reasonable price. In this economy, who knows what will happen next? My goal is to be prepared for life's curveballs. The time to strengthen your credit rating is when you don't need it. Since I live in an very high COLA, paying off a mortgage is less important to me than a big, fat emergency fund, lots of dough stashed in retirement accounts and excellent credit.

arebelspy

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Re: Should I take out a small car loan just to boost credit score?
« Reply #21 on: April 24, 2012, 08:18:05 AM »
Keep in mind that not everyone's goals are the same.

Personally, I'm looking to retire once I have 1MM in liabilities.

One path that I may likely take is to NEVER pay off a mortgage, eventually acquire over 20 of them, and refi them to longer terms to take cash out when they get paid down.

Mathematically it's far, far superior to paying them off.

Not everyone is anti-debt.
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smedleyb

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Re: Should I take out a small car loan just to boost credit score?
« Reply #22 on: April 24, 2012, 01:15:48 PM »
In case anyone is wondering, arebelspy is not Dave Ramsey. lol.

But yes, not all debt is evil.  Making millions convincing others it is evil might be, though. 

grantmeaname

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Re: Should I take out a small car loan just to boost credit score?
« Reply #23 on: April 24, 2012, 01:24:32 PM »
The time to strengthen your credit rating
I don't know that you are strengthening it, and I think several posters have tried to point that out. What could you do with an 820 credit rating that you couldn't do with a 780 credit rating? How are those two any different from each other?

catalana

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Re: Should I take out a small car loan just to boost credit score?
« Reply #24 on: April 25, 2012, 04:02:36 AM »
My brother and I had a conversation recently about credit scores. I have no particular interest in them, except as it applies to mortgage debt. As mortgage rates change over the years, what once was a great rate is no longer. I have lowered my mortgage rate significantly as rates dropped, primarily because of my high credit score, high savings and LACK OF CONSUMER DEBT. I only know my credit scores because I did a re-fi on my house last year to get my rate below 4%.

You've just hit the nail on the head I reckon.  Your car loan (I believe) has zero chance of decreasing the rate on debt when you next remortgage.  In fact, it may even increase it.  There are other factors that are far ahead of credit scores which lenders use when determining whether to give you mortgage debt and the rate to offer - namely rate available to them on the interbank market, their current book and appetite to lend to a particular segment, your LTV ratio, age, location of property, your income and financial commitments which reduce that income (the consumer debt you want to take on).

I think gooki is speaking a lot of sense, but you just don't like it.  Why take out debt when you have savings?  It might help you get more consumer debt at a decent rate, but why would you want to do that?
« Last Edit: April 25, 2012, 04:55:58 AM by catalana »

arebelspy

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Re: Should I take out a small car loan just to boost credit score?
« Reply #25 on: April 25, 2012, 09:13:12 AM »
In case anyone is wondering, arebelspy is not Dave Ramsey. lol.

Hah!  :D   Certainly not.

FWIW, I agree that the car loan may not raise the OP's credit score and that even if it did, it may not be worth it (i.e. the higher score may do nothing for you).

My only point was that credit can be quite beneficial to get you good debt / leverage.  Mortgage payoff and being debt free may be some people's goals, but it's not the path everyone heading to FI takes.
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Dicey

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Re: Should I take out a small car loan just to boost credit score?
« Reply #26 on: April 30, 2012, 12:12:04 AM »
Hi Everyone,
Thanks to all for your thought-provoking feedback.
I did it yesterday. I traded my pink slip for some "invisible" cash. I borrowed 5K for 24 months. Here's my repayment strategy: After 30 days, I will pay back half the loan. I will then pay the balance off over the next twelve months, IF I can stand to wait that long. Payments will be transferred from the savings account automatically. I decided to take more than I originally mentioned because of the decision to pay back half right away. I have a vague idea that this scenario might be more effective if if shows that the loan balance is less than half the total loan amount fairly quickly. I freely admit that this is a hack that may or may not work. I'll wait for about six months to ping my scores. If it has worked, I may just pay it all off then. The only surprise was a $15 DMV fee that the CU said they could not waive. I can live with that. Oh, and with autopayment and all that jazz, the interest rate is 2.19%. Not bad for a used car. I may have gotten a hair less interest elsewhere, but my CU is local. It took 20 minutes from start to finish. Interestingly, they did not pull my credit scores to approve the loan. It was "auto-approved" based on my existing account. Again, thanks to everyone. I've learned quite a bit and will let you know the results.

arebelspy

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Re: Should I take out a small car loan just to boost credit score?
« Reply #27 on: April 30, 2012, 03:11:26 AM »
Good luck.  Thanks for updating us.

Might as well stick it out the full term now that you've gone for it.  Whether or not scores are raised in 6 months, who's to say they won't raise if they haven't yet, or won't go higher even if they have gone up?  Might as well give it the full experiment now that the ball is rolling, IMO. (And check scores now, at 6 mo., at 1 yr., and 18 mo., after it's been paid off awhile, to see if paying it off raises them or lowers it back down or what).

I'll be interested to hear the results.
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Dicey

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Re: Should I take out a small car loan just to boost credit score?
« Reply #28 on: April 30, 2012, 09:51:53 AM »
I wrote that post late last night and omitted a confusing detail or two: Once I decided to take a higher amount and then pay off half, I had to opt for a 24-month term for this to end up being a 12-month loan. The monthly payment is fixed, so if I paid off half of a 12-month loan, there would only be six payments left. With the method outlined, the whole thing will be paid off in 12 months. I haven't the stomach for anything longer. There is a cost/benefit ratio here and I don't want to exceed it or my comfort level by dragging things out.
I like your idea of checking at regular intervals. Any thoughts on how to obtain my credit scores cheaply along the way? I am not score-obsessed and only know what they were when I re-fied last December.

grantmeaname

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Re: Should I take out a small car loan just to boost credit score?
« Reply #29 on: April 30, 2012, 10:33:22 AM »
You can get a free credit report up to once every year from each of the three credit rating agencies: Experian, Equifax, and TransUnion. Just get one from one of the agencies now, then another in six months, and another in 12 months.

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Re: Should I take out a small car loan just to boost credit score?
« Reply #30 on: April 30, 2012, 04:02:15 PM »
You can get a free credit report up to once every year from each of the three credit rating agencies: Experian, Equifax, and TransUnion. Just get one from one of the agencies now, then another in six months, and another in 12 months.

Those give you a credit report, but not a score. That won't help the OP trying to tell if her score went up or by how much.

You can subscribe to a yearly service for 10-15 bucks, IIRC, which may be more efficient than one time payments if you're going to check it regularly.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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Dicey

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Re: Should I take out a small car loan just to boost credit score?
« Reply #31 on: April 30, 2012, 10:11:00 PM »
Thanks ARS for your helpful reply. You are completely correct that I do not need to run my credit report more often, I'll just need the numbers. What does IIRC stand for?

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Re: Should I take out a small car loan just to boost credit score?
« Reply #32 on: May 01, 2012, 07:10:38 AM »
I'm sure the advanced Mustachians here already know this, but be wary of checking up on your credit score too often.  Multiple inquiries can cause it to be lowered. 

I never keep track of my score, but I recently bought a house with a primary conforming mortgage and a HELOC (given my tax bracket, I benefit from the mortgage interest tax deduction).  Both lenders were required to disclose the scores they used to set my rate.  The HELOC was the second loan approved, and my credit scores were lower.  The only new reason cited was that I had too many inquiries on my record.  It was not significantly lower, and had no impact on the interest rate I was given, but I suppose it could have had I been more of a borderline case.

herisff

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Re: Should I take out a small car loan just to boost credit score?
« Reply #33 on: May 01, 2012, 07:20:53 AM »
What does IIRC stand for?
If I Recall Correctly

When you pay for your credit score, be sure to get a Fico score. As I'm sure you know, there are many vendors selling their own variant/version of the  score. I've never bothered to pull my own, but I understand that MyFico is the place to go to get your Fico scores.

arebelspy

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Re: Should I take out a small car loan just to boost credit score?
« Reply #34 on: May 01, 2012, 07:24:42 AM »
I'm sure the advanced Mustachians here already know this, but be wary of checking up on your credit score too often.  Multiple inquiries can cause it to be lowered. 

I never keep track of my score, but I recently bought a house with a primary conforming mortgage and a HELOC (given my tax bracket, I benefit from the mortgage interest tax deduction).  Both lenders were required to disclose the scores they used to set my rate.  The HELOC was the second loan approved, and my credit scores were lower.  The only new reason cited was that I had too many inquiries on my record.  It was not significantly lower, and had no impact on the interest rate I was given, but I suppose it could have had I been more of a borderline case.

That's only if you're applying for credit and someone ELSE is checking your credit.  Then too many inquiries (about opening new lines of credit) hurt your score.  If you check your score, it's called a soft pull instead of hard pull, and it doesn't affect your score in the slightest.  Doesn't apply in the OP's situation.

Also herisff is correct on both IIRC and FICO score.
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Re: Should I take out a small car loan just to boost credit score?
« Reply #35 on: May 01, 2012, 07:33:43 AM »
I'm sure the advanced Mustachians here already know this, but be wary of checking up on your credit score too often.  Multiple inquiries can cause it to be lowered. 

I never keep track of my score, but I recently bought a house with a primary conforming mortgage and a HELOC (given my tax bracket, I benefit from the mortgage interest tax deduction).  Both lenders were required to disclose the scores they used to set my rate.  The HELOC was the second loan approved, and my credit scores were lower.  The only new reason cited was that I had too many inquiries on my record.  It was not significantly lower, and had no impact on the interest rate I was given, but I suppose it could have had I been more of a borderline case.

That's only if you're applying for credit and someone ELSE is checking your credit.  Then too many inquiries (about opening new lines of credit) hurt your score.  If you check your score, it's called a soft pull instead of hard pull, and it doesn't affect your score in the slightest.  Doesn't apply in the OP's situation.

Also herisff is correct on both IIRC and FICO score.

This is why a little knowledge is a dangerous thing.  I stand corrected.

arebelspy

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Re: Should I take out a small car loan just to boost credit score?
« Reply #36 on: May 01, 2012, 08:01:42 AM »
This is why a little knowledge is a dangerous thing.  I stand corrected.

That's why we're here; to share information and learn.  I've stood corrected a dozen times or more on these forums so far.  ;)
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Re: Should I take out a small car loan just to boost credit score?
« Reply #37 on: May 01, 2012, 08:56:19 AM »
Those give you a credit report, but not a score.
So it's just the data that the CCRAs use to calculate your score and not your calculated score itself that you're entitled to?

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Re: Should I take out a small car loan just to boost credit score?
« Reply #38 on: May 01, 2012, 09:21:43 AM »
Get Rich Slowly recommends Credit Karma, which gives some sort of score. I have no idea whether it's a real score or one of their own making.

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Re: Should I take out a small car loan just to boost credit score?
« Reply #39 on: May 01, 2012, 09:31:14 AM »
Those give you a credit report, but not a score.
So it's just the data that the CCRAs use to calculate your score and not your calculated score itself that you're entitled to?

Correct, it's your credit report, which lists your accounts, time opened, payment history, etc.  Not a score.
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Re: Should I take out a small car loan just to boost credit score?
« Reply #40 on: May 01, 2012, 12:32:23 PM »
Get Rich Slowly recommends Credit Karma, which gives some sort of score. I have no idea whether it's a real score or one of their own making.

Credit Karma gives you a score based on your Transunion score; credit sesame gives a score based on your Experian report; and the actual Fico score is a product sold by Equifax.  Credit Karma and Credit Sesame will give you a good idea of what your score is without having to pay for it.

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Re: Should I take out a small car loan just to boost credit score?
« Reply #41 on: May 01, 2012, 12:36:21 PM »
I'm sure the advanced Mustachians here already know this, but be wary of checking up on your credit score too often.  Multiple inquiries can cause it to be lowered. 

I never keep track of my score, but I recently bought a house with a primary conforming mortgage and a HELOC (given my tax bracket, I benefit from the mortgage interest tax deduction).  Both lenders were required to disclose the scores they used to set my rate.  The HELOC was the second loan approved, and my credit scores were lower.  The only new reason cited was that I had too many inquiries on my record.  It was not significantly lower, and had no impact on the interest rate I was given, but I suppose it could have had I been more of a borderline case.

There is a difference between a "soft" inquiry (you checking your own score), and a "hard" inquiry (mortgage lender or CC company inquiring about your creditworthiness before extending credit); namely, the first does not impact your score, whereas each hard inquiry causes your score to drop anywhere from 2-5 points.

Also, mortgage lenders tend to run an inquiry with all 3 major credit reporting agencies, whereas credit card companies usually make just one inquiry (unless it's CapOne, which routinely pulls all 3 reports when you apply for a CC).


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Re: Should I take out a small car loan just to boost credit score?
« Reply #42 on: May 01, 2012, 05:06:49 PM »
I thought if you have a 720+ FICO score you would automatically qualify for the best possible interest rate? Someone please correct me if I'm wrong.


arebelspy

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Re: Should I take out a small car loan just to boost credit score?
« Reply #43 on: May 01, 2012, 05:23:28 PM »
I thought if you have a 720+ FICO score you would automatically qualify for the best possible interest rate? Someone please correct me if I'm wrong.

It's usually 750.  720 is the second tier below that.  But that's for mortgages.  I believe it can also depend based on the product (P2P loan, for example).
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Re: Should I take out a small car loan just to boost credit score?
« Reply #44 on: May 01, 2012, 06:16:03 PM »
I haven't posted here simply because my view has been covered, I think it's a waste of time and money.


Having said that, I'll be interested in the results.  But I also have to assume this has been done before and reported on many times.  A simple search pointed to many articles with titles suggesting it has been done, but I'm not going to spend a ton of time reading them.  Anyway, I assume the result will be a slight uptick to your score without any actual benefit.  Hopefully you will get what you wanted out of the process though, good luck and let us know how it turns out!

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Re: Should I take out a small car loan just to boost credit score?
« Reply #45 on: May 01, 2012, 11:21:31 PM »
I thought if you have a 720+ FICO score you would automatically qualify for the best possible interest rate? Someone please correct me if I'm wrong.

It's usually 750.  720 is the second tier below that.  But that's for mortgages.  I believe it can also depend based on the product (P2P loan, for example).

720 used to get you the best rates, but not after the credit crunch. "Today's 760 is what a 720 used to be." http://www.bankrate.com/finance/credit-cards/what-s-a-good-credit-score.aspx

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Re: Should I take out a small car loan just to boost credit score?
« Reply #46 on: May 02, 2012, 12:11:17 AM »
Wow! Thanks for all the input, everyone.
I l-o-v-e IIRC. Now that I know what it means, I'll probably use it a lot, as my memory stinks. So then, does "I stand corrected" = ISC? Because I do that a lot, too.
Note to James, you are correct. I did several searches and spent a chunk of time sifting through a lot of crap, but couldn't find a definitive answer. Most of it was aimed at Stupid Consumers, of whom there are very few in these parts :)
I know my quest is a bit esoteric, which is why I turned to the sharply pointed moustache-ian minds here for help. You did not disappoint. Thank you.

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Re: Should I take out a small car loan just to boost credit score?
« Reply #47 on: May 02, 2012, 05:21:44 PM »
Keep in mind that not everyone's goals are the same.

Personally, I'm looking to retire once I have 1MM in liabilities.

One path that I may likely take is to NEVER pay off a mortgage, eventually acquire over 20 of them, and refi them to longer terms to take cash out when they get paid down.

Mathematically it's far, far superior to paying them off.

Not everyone is anti-debt.

Interesting strategy - any place you can point me to that discusses this and shows the math?

Thanks!!!

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Re: Should I take out a small car loan just to boost credit score?
« Reply #48 on: May 02, 2012, 05:45:44 PM »
Interesting strategy - any place you can point me to that discusses this and shows the math?

Thanks!!!

Try arebelspy's post on the matter (may want to read up the thread for more context...)

arebelspy

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Re: Should I take out a small car loan just to boost credit score?
« Reply #49 on: May 02, 2012, 07:37:47 PM »
Keep in mind that not everyone's goals are the same.

Personally, I'm looking to retire once I have 1MM in liabilities.

One path that I may likely take is to NEVER pay off a mortgage, eventually acquire over 20 of them, and refi them to longer terms to take cash out when they get paid down.

Mathematically it's far, far superior to paying them off.

Not everyone is anti-debt.

Interesting strategy - any place you can point me to that discusses this and shows the math?

Thanks!!!

grantmeaname nailed it.

And actually someone just PM'd me the same question this morning.  The following is what I sent to them as a reply.


Hah!  That's a good question. 

Having mortgages is indeed mathematically superior, and if you want to actually get rich you'll want to use leverage like that - basically every non-lotto winner successful businessman does.  I don't care about getting rich, but I do care about hitting FI as fast as possible.

The advantage comes from a combination of three things:
1) Leverage - discussed in this MMM post here:
http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

Specifically read "Strategy 2" in that article.  I'm the one who wrote the post he quotes.  Essentially leverage (i.e. having a mortgage) will let you earn more money in a variety of ways (more tax advantages via depreciation, more cash flow, more principal paydown - obviously, and more appreciation if any happens, mortgage interest writeoff, etc.).  It's mathematically much better.

2) Inflation protection - as the dollar is worth less, such that more dollars are being printed, your fixed mortgage becomes smaller and smaller as a percent of your spending.   So let's say your mortgage payment is $1000.  Bread is $2, gas is $5.  Now inflation hits, stuff doubles in price over a few years.  Bread is $4, gas is $10, and your mortgage is... still $1000.  Effectively it costs you HALF as much in real dollars due to inflation.  (And rents will go up, meaning if you rent your payment is higher, but not if you own a mortgage, and if you rent it out to someone, you'll make more, but not have to pay more.)  Having no mortgage, you aren't saving anything in your budget.  But the mortgage helps protect you from inflation.

3) TAX FREE gains.  As I outlined in this thread: http://www.mrmoneymustache.com/forum/investor-alley/get-rich-with-a-mortgage!/

You can continually refinance to gain the market value .  This further protects you from inflation (because the refi amount rises with inflation), but just as important, the amount you pull out from refinancing isn't income.  So you don't get taxed on it!  If you just have one house, you'd only refinance every 24 years or so (once it's doubled in value).  Now imagine you have 24 houses, such that you can refi one per year.  That's 100k (in the example below, or whatever the nominal value of the house is) per year, tax free.

My post in that thread, to help explain a little more, said:
Quote
Sure, I think that could be a great idea.  For me, it likely won't matter, because I'm planning on refinanacing every so often (even at *gasp* higher future rates) in order to tap equity.  With home prices growing to (roughly) equal inflation, your 100k home, at 3% inflation per year, will be worth roughly 326,000 in 40 years.  That's money sitting I'd rather have access to.

Though your strategy might be good for if you are just having your one (primary) residence.

Refinancing works especially well with rentals.  Refinancing gets you money out TAX FREE. 

Here's an amazing strategy.  Say you have 24 rentals worth 100k each.  Rule of 72, 3% inflation means they double in value every 24 years.  You do a mortgage ladder where one is 30 years from paying off, the other 29, the next 28, etc. and so on down.  Each year, you refi the one that is closest to paying off to max out the term.  You gain all the untapped equity.  The next year, you refinance the next one, and so on, each year, until you get back to the first one.  24 years later.  By that time, it's approximately doubled in price.  You refi to take out 100k (in 2011 dollars) tax free.  The next year, house #2, which has doubled since you last refi'd it, you tap 100k in today's dollars.

Every single year your refinance gets you what the house is worth, in today's dollars, completely tax free.

As long as the rent covers the mortgage (and since rents rise with inflation, if you bought it right and kept it up, it should), you are gaining the value of one of the houses every year into your pocket tax free.  Aside from any cash flow the house itself provides.

I'd take 100k/year, inflation adjusted, just for filling out refinancing paperwork once/year.

...but that's a separate side tactic.

So those are some reasons why mortgages are superior to free and clear.  Sure, being debt free (including "owning" your house - though it can get taken by an HOA, government via eminent domain, not paying taxes, etc.) gives you a warm, squishy feeling.  But it sure won't make you as much money.  So me?  I'll load up on debt, as long as I'm comfortable with the ability to repay. Because frankly I'd rather pay a little interest and let the bank earn some money if it will make me even more money! 

Hope that helps/makes sense.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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