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In the credit building/repair industry, there are some companies offering self lending. That is, you take a loan in the form of deposit in a savings account. Then you pay it in monthly installments over a year. At the end of the year you take out the deposit plus a small APY, but minus a large APR. The company claims to report it to credit bureaus as an installment loan, hence it is a way to build credit. My question is: does this really work? If so, how does it compare to secured credit cards in terms of credit building?

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Is it worth spending extra money to use a scheme that will establish or repair your credit? That depends on how badly you need credit. For someone ready to purchase a home, it could be very beneficial to establish better credit before signing a mortgage. Whether the cost is worth paying can only be determined in specific scenarios.

How does this compare to secured credit cards? By definition those are revolving credit, where this scheme appears to be a loan with a 1-year term. I would expect that having regular payments on an account that will stay open longer will have the bigger benefit, but there are a few people that might benefit from having other loans in the mix.

  • I guess it also depends on how bad a credit one starts with. Since such a scheme does not seem to impose any risk to the lender, it doesn't require a minimum credit to apply. Which leads to another question: will credit reporting agencies begin to think of this as a sort of system gaming and start to crack down on it? – user53560 Feb 18 '17 at 6:46
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    FICO formulas can be updated as needed. This scheme does demonstrate the ability to make regular payments. It may not be as abusive as you think. Certainly no worse that secured credit cards. Risk to the lender isn't the legal test of whether it is a loan or not. – NL - Apologize to Monica Feb 18 '17 at 12:46
  • @user53560 Why does this have no risk to the lender? I'm presuming the savings account will be in the borrower's/credit-repairer's name, so they could potentially run away with it, as with any loan. If it were not (legally) in their name, then I would expect (though am not in the US) that FICO would disregard such payments (or move to do so if the practice became widespread). – TripeHound Aug 14 '17 at 8:30

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