Get a loan, and then repay that loan with the loan itself

Question

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.

Would applying for a loan in this manner and paying it off really increase my credit score?
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?
If this is a viable option, what should the repayment plan be to maximize the impact on my credit score?

CQM · Answer

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!

Get a loan, and then repay that loan with the loan itself

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