STEP 1 – Locate a Small Bank that Meets Your Requirements
I recommend that you work with smaller community banks and not the major chains. The smaller banks are more likely to have the exact type of account that you will need to open, and they are more likely to work with you and be flexible. Savings & Loan institutions and Credit Unions can also be used, provided they meet the requirements. The product you want is called the “Passbook Savings Account,” which is basically just a simple savings account. And the type of loan you will take out is a “Passbook Savings Loan.” This is the easiest type of loan to get because it is totally secured with your own cash. Most banks are only willing to loan you 85% of the amount you have on deposit, so there is always some reserve money in the account.
Your target bank will be suitable for this method if it meets the following three requirements:
A. The bank must have a Passbook Savings Account product with NO MONTHLY FEE on balances of $500 to $1,000.
B. You must be able to borrow up to 85% of your balance on a 12-month loan schedule. This is typically called a Passbook Savings Loan.
C. CRITICAL: The bank MUST report activity on this account to the three major credit bureaus (Experian, TransUnion, and Equifax).
If the bank product does not meet these requirements, then do NOT use that bank. There are thousands of small banking institutions throughout the country, so it should be fairly easy for you to find an appropriate one in your local area.
STEP 2 – Open a Passbook Savings Account
Go to the bank you’ve chosen and open a Passbook Savings Account for $1,000 or less—depending on what you have to work with. Take your Passbook home and wait a week or so, because you don’t want it to look like you opened the account only for the purpose of taking the loan.
STEP 3 – Obtain a Passbook Savings Loan
Return to the bank and ask to see a loan officer. Look your best, be courteous, and explain that you wish to take out a Passbook Savings Loan for $850 (or 85% of whatever amount you actually deposited).
When you take out your loan, your savings account is frozen. However, every time you make a payment you unfreeze an amount equal to your payment, less a few dollars for interest. Be sure to ask that the loan term be for at least one year, with minimum monthly payments. Do not get a simple one-year loan with no payments. This will not benefit you at all, because you are trying to establish a history of payments.
You will not be turned down for this type of loan no matter what your previous credit history and in most cases it will not even be checked. If you have bad credit, make sure you tell your loan officer before he or she pulls your credit history. Tell the bank representative you are trying to re-establish your credit and that a good credit rating is very important to you now.
STEP 4 – Make Your Payments
Assuming an interest rate cost of 6%, your monthly payments on the $850 loan will be $73.16. (Remember, this is a secured loan, so the interest rate should be fairly low.) Since you have “borrowed” $850 in cash, you will use that money to keep the payments going on the loan. Be sure to make your payments well before the due dates. Always pay EARLY in order to be on the safe side in establishing good payment history.
STEP 5 – Pay Off the Loan Early
After six months, pay off the loan early. At this point, you will have approximately $980 remaining from your original $1,000 deposit, part of it as cash on-hand, and some remaining in the savings account. You will have paid a whopping $20.31 in interest (assuming the rate was 6% for the secured loan). I’m sure you will agree that $20 is a small price to pay for adding six months’ worth of good payment history to your credit report!