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Due to some unfortunate circumstances, my credit score dropped 300 points in less than a year.

I had a procedure done at the local hospital, which ended up costing around $800. I gave them my insurance information (I was dually covered by my work, as well as my parents) and was done with it. A couple of months later, I get a letter from collections saying I owed them the $800. Confused, I called the hospital and asked them what had happened, and they replied that one of the insurances didn't go through. I asked them to read the number to me, and the last couple of digits were transposed. I told them the correct information, but they said there was nothing they could do about it because it was no longer under their control for billing, and I'd have to speak to the collection agency.

I called them, and they said the only thing they could do is process payments from me. This started a back-and-forth with me, the agency, and the hospital to get it resolved (the hospital acknowledged it was their mistake in data entry). This continued for several months. The $800 is now suddenly not reported on my credit report, so the hospital and agency may have worked it out (I just found this out today). My credit score however is still around what it was previously.

Viewing my credit score on Credit Karma results in recommendations of getting a small loan and then paying on it to increase my credit score. I have a couple of questions about this.

  1. Would applying for a loan in this manner and paying it off really increase my credit score?
  2. If I were to get the loan (say, $1000.00), could I simply make monthly payments, primarily with the money from the loan, and pay the interest with the money I make at work?
  3. If this is a viable option, what should the repayment plan be to maximize the impact on my credit score?
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    Why are you going to such lengths to increase your score? You can raise your score by having good credit hygiene and not have to waste money in interest payments for a loan your don't need. Is there some reason why you cannot simply wait for a couple of years?
    – MrChrister
    Apr 20, 2015 at 16:54
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    The only way you'll fix this is to address the circumstances that caused your score to drop so much. You cannot borrow your way out of debt. Instead of spending your money on interest for a loan you don't need, spend it on paying off your debt. Are you sure you aren't just using a potential bump in your credit score as an excuse to borrow more money?
    – Ben Miller
    Apr 20, 2015 at 17:18
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    If you just found out today that the bad $800 debt is no longer on your credit report, then give your score some time to catch up. If you don't have any negative info on your credit report, your score will bounce back to where it was. Don't pay unnecessary interest to try to fix this.
    – Ben Miller
    Apr 20, 2015 at 17:55
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    If the $800 isn't being reported anymore I wouldn't be surprised if your score goes back up next month.
    – Loren Pechtel
    Apr 20, 2015 at 17:57
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    Your credit score is derived from your credit report, and with few exceptions, nothing can be on your report for more than 7 years.
    – MrChrister
    Apr 20, 2015 at 19:53

1 Answer 1

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This works even better when you have a good credit score when you want to arbitrarily inflate it for bragging rights or lowest interest rates, I'm only pointing this out because it has nothing to do with your current score and CK's recommendation.

The presence of an installment loans is 10% of your credit score, according to some credit scoring models. So theoretically someone with a solid 720 score could gain 72 points, while someone with a 480 score would only gain 48 points. But the scores are weighted so you wouldn't get that kind out outcome regardless, it will have less of an impact.

You can do this, amongst other things, but if that installment loan alters your utilization of credit it will more greatly lower your score, and the hard inquiry to apply for the loan will also temporarily hurt your score and you also might not be approved.

These are the things to consider (but fortunately utilization has no history). Yes you can pay the loan off with a monthly payment. The loan's interest will cost slightly more than the monthly payments, by the end of the loan term.

I've done this with a 5 year $500 installment loan at a credit union.

As others pointed out, you don't have to spend money to raise your credit score (unnecessary interest, in this case), but you certainly can!

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    Prepayment penalties could be another factor to consider? When you did this with a 5 year loan, what did you get for it? What was your total cost? Just curious?
    – MrChrister
    Apr 20, 2015 at 16:56
  • @MrChrister $518 was the total cost. I didn't get anything for it, except $500 in the checking account, which I immediately set to automatic payments.
    – CQM
    Apr 20, 2015 at 18:08
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    Then it cost you $18; but did you get a higher score? A lower interest rate? An $18 lesson in patience?
    – MrChrister
    Apr 20, 2015 at 19:54
  • @MrChrister yes it did immediately boost my score substantially when it reported, across all scoring models I have access to. I didn't know what you were asking, because I already mentioned what it does. Just look at the formula. The same institution then gave me a 30k credit limit on a brand new credit card because of my 'excellent' credit history (amplified by my $500 installment loan). All institutions offer eligibility for the better interest rates based on strong/better credit history.
    – CQM
    Apr 20, 2015 at 20:00
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    My point is that you spent $18 to "amplify" your already excellent score to get a credit card with a higher limit. I would suggest that your $18 wasn't well spent, as it earned you nothing but a higher limit and a higher score. (Or as you put it, "bragging rights"). I personally don't value bragging rights, and $18 is probably a trifle, but I was curious if I was missing something from your answer. I think you answered the question, even if I disagree with the premise.
    – MrChrister
    Apr 20, 2015 at 20:09

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