So, I’ve found a loan that’s available to me with the interest deferred. I was thinking of taking the loan, parking it in a CD, and paying it off as soon as it’s due. I’ve already checked and there’s no early repayment penalty. A friend of mine says doing this will hurt my credit score. I know that this wouldn’t be a good way to build credit, but I can’t see how it will hurt credit. Will it?
It depends. If you already have a lot of debt, additonal debt can hurt your credit score. Incurring debt and paying it off is actually good for your credit score.
You need to make sure that when the debt is due, that you won’t have to incur any penalties to get the money out of the CD to pay back the loan.
Not an answer to the credit score question, but I wonder how you’re going to make this work. Are you finding CD interest rates that exceed the rate on the loan? Because the CD rates I’m seeing are only like two percent or so.
The interest on the loan is 0% until after some point in time in the future (12 months or so) then interest begins accruing – an interest deferred loan.
With CDs only returning 2-3% how much of a loan are we talking here?
Are they really offering 12-month interest deferred loans of $10K? Where can I get one?
Even at that amount you’re banking what, $200-$300?
Slim pickings nowadays:
A few years back I had >$100K on credit cards at 0% invested in CDs at 5-6%.
With todays interest rates I don’t bother.
I suspect we’ll start to see better offers once the economy recovers a bit…
I’m not worried about whether the couple hundred I would clear is worth it. The way I see it, it’s going to go straight into my IRA. And it is more or less risk free, assuming I don’t do something stupid like spend the money when the CD matures. My only question is whether a lender would report a loan being paid back as soon as it’s due, and whether the credit agencies would factor take points off a credit score for this.
So far the only problem I see is that if you do this too much you’ll end up with an excessive amount of debt, which would hurt your credit.
I’ve heard about these arrangements before, and one of the biggest dangers is making sure that you scrupulously make every payment date on the loan. If you don’t, you could be slapped with late fees and interest that will wipe out your entire profit.
Another person here who used to play the Fatwallet Finance AOR game, for awhile I was bringing in between $5K-$10K a year doing this. Ahhhhh, the good old days, it is just not worth the work anymore. At any rate, Robert pointed out the big danger, it only takes one small mistake to mess up your profits. As far as your credit report, it will temporarily drop as your amount of debt will increase (for a typical credit report you’re talking maybe 10 pts, the less overall credit you have the larger the drop). After you pay it back it should go back to its previous level or higher. If you are planning on taking out a house or car loan in the next year I wouldn’t do it, but otherwise go for it.
Keep in mind I think inflation is 1.5% or so. Assuming you dump it in a 2% CD, your overall profits are just not going to be that much. Even all the money grubbers at fatwallet finance forum have stopped this tactic.
Missed the edit window, but wanted to add that if you are just looking to pick up a couple hundred dollars for your IRA your time would be better spent looking for bank and credit card sign up bonuses. Search around and you should be able to find some for about $100 each.
I would check on the terms of that loan again. I think you would find that your pay rate is zero but interest still accrues and gets tacked onto the loan balance or is just set aside and fully payable at maturity. What you then find is that you are paying interest on interest, making the effective rate higher.