Have you ever been denied a credit card or a loan due to poor or no credit? Credit-builder loans are a way to circumvent this issue. You put money into a savings account, which serves as collateral for a credit card for the same amount. It works in the same way as a regular credit card. You make monthly payments if you have a credit balance. Payments are reported to credit bureaus, which can help you build or improve your credit score.
But what if you don’t have enough money to put into a savings account to start building credit? Self (formerly Self Lender) enters the picture at this point. They’re a unique type of credit-building program. They set up a loan program with payments going into a certificate of deposit instead of a security deposit.
You’ll have a fully funded certificate of deposit at the end of the program, in addition to building or improving your credit rating.
Customers can use Self to help them build or improve their credit score. The company is based in Austin, Texas, and was founded in 2014. Sunrise Banks, N.A., a Minnesota-based bank founded in 1962, and Lead Bank, a Missouri-based bank reorganized in 2010, but in business for more than 80 years, are among the company’s partners.
As of June 2018, Self had set up and serviced credit builder accounts for over 120,000 people. In just four years, that’s a lot of accounts.
It differs from other credit-building programs in that it does not require any type of security deposit.
In practice, it works by establishing a loan that you effectively pay back to yourself. The money is yours once you’ve made the payments.
Consumers in all 50 states can participate in the company’s program.
Individuals who want to improve their credit can use the service, but it is not available for businesses.
The Better Business Bureau has given Self a “A” rating (on a scale of A+ to F), and it has been accredited since January 2016.
How Self Works
Unlike traditional credit-building loans, which require a security deposit–usually into a savings account–Self arranges for you to fund a certificate of deposit (CD). The CD can be purchased for 12 or 24 months. You have the option of selecting one of four different amounts for the CD.
The CD is held in your name at Sunrise Banks, N.A. or Lead Bank and is fully insured by the Federal Deposit Insurance Corporation (FDIC). The certificate is “locked” once the CD is opened, and it cannot be withdrawn until the loan is fully paid.
You will make monthly payments that will add up to the total amount owed on the CD. The CD is available for withdrawal at the end of the loan/CD term. In the meantime, your payment history is reported to all three major credit bureaus.
Self gives you a choice of four loan/CD amounts, as shown in the screenshot above. You have the option of paying $525, $545, $1,000, or $1,700. Depending on the amount, the terms are 12 or 24 months.
Payments will be made on a monthly basis, ranging from $25 to $150. The CD will be yours once the loan is paid off, including interest.
As you can see from the bottom half of the screen shot, you’ll have to pay a total of $609 over the course of 24 months in order to get a CD worth $525 plus interest. You’ll end up paying a total of $84 in interest and activation fees. This results in an APR of 14.92 percent, which is comparable to the lower end of most credit card interest rate ranges.
The Self dashboard is where users manage the entire process. You can make monthly payments there, as well as track your credit history and track your “Savings Progress.” This is the estimated value of your account on any given day if you were to close it.
The following is how the Savings Progress formula works:
- Principal of CD (no interest),
- minus the balance of the loan,
- minus the amount of interest that has already been paid on the loan,
- minus any unpaid fees (if applicable),
- If you terminate your CD early, you will receive a refund minus a CD early withdrawal fee.
Of course, because you can’t take the money out of the CD early, this formula is only theoretical.
Withdrawal of CD
Throughout the term of the CD, you will earn interest, and upon completion of the loan payments and the maturity of the CD, the entire certificate balance will be released to you. You can choose to have the funds paid out when the CD matures. After you submit your request, you should expect to receive them within 10 to 14 business days.
The program has one major drawback: you cannot temporarily suspend your account. Because this is a credit builder account, if you miss a payment, it will be reported to the credit bureaus as late. If a payment is more than 30 days late, it is reported as late.
The Self Credit Builder program, on the other hand, allows you to achieve two important goals:
Build (or improve) your credit score with each of the three credit bureaus.
Self Features and Benefits
If you have bad credit or no credit, you will not be denied a credit builder account. The ChexSystems database of past retail banking history is used to determine eligibility for a Self credit builder account. ChexSystems is used by Self’s bank partners to determine your eligibility. This system acts as a kind of credit report, keeping track of your past banking relationships.
In general, according to Self, establishing a FICO score will take at least six months of on-time payments. They also warn that if you already have a credit score, it may fall slightly if you take out a credit builder loan because it is a new and unproven obligation.
In the first six months, self-reporting customers with a $1,100 credit builder account in good standing saw an average credit score increase of 45 points. They also claim that subprime customers’ credit scores improve by 20 to 25 points over the course of the loan.
On the Self dashboard, you’ll be able to see your credit score.
Making Regular Payments
You can either make one-time payments each month or set up automatic payments by linking your bank account to your Self account.
Beneficiary of the Account
You can designate a beneficiary for any funds paid into your Self credit builder account when you open one.
You can pay off your credit builder account whenever you want. There are no additional charges or penalties if you do so. Once you’ve done so, you’ll be given the CD’s proceeds as well as any interest that has accrued. The CD’s holding bank, on the other hand, will levy an early withdrawal penalty.
Because the primary goal of the credit builder program is to build or improve your credit score, Self advises against making early payments. When the full payment term has expired, this should occur.
Budgeting, credit cards, debt, financial health, student loans, auto loans, mortgages, and other credit and personal finance topics are covered on the site’s blog.
Program for Self-Referral
You’ll get $10 if you refer a friend who makes their first successful credit builder account payment.
Why is it better to use your own money rather than a secured card, co-signed loan, or prepaid card
Other types of cards are used by some people with bad credit or no credit to build credit. A secured credit card is one of them. This type of arrangement will report monthly payments to all three credit bureaus in the same way that Self will. Meanwhile, you can use the secured card in the same way that you would a regular credit card.
A secured card has the drawback of requiring you to fund a savings account as security. You won’t be able to get the card if you don’t have the cash. And you won’t be able to access those funds until your credit line is paid off or the bank releases the account’s security lien.
A secured card has one advantage over a Self account in that it can be used as a credit card. You will, however, be charged interest on that card, which may be higher than the APR charged on the various Self plans.
Getting a loan with a co-signer is yet another way to improve your credit. As a result, the interest rate will be lower and the terms will be better. This obviously won’t work if you don’t have a cosigner with good credit who is willing to cosign for you. Furthermore, if you miss any payments or default on the loan, your co-credit signer’s will be affected, and he or she will be responsible for paying the remaining balance. This could jeopardize a good friendship or even a family relationship.
Finally, some people with no credit or bad credit use prepaid cards to get by. While these can function as credit cards, they do not contribute to the development of your credit history. You also can’t spend more than the amount you put on the card, just like with secured cards.
There is no application fee.
Activation fee: $9 to $15, depending on the amount of the loan or CD.
Interest rate/annual percentage rate (APR): 12.03 percent to 15.65 percent.
Late payments: Monthly payments have a 15-day grace period. The late fee is equal to 5% of the scheduled monthly payment after the grace period has expired.
The following is the late fee schedule:
- For the $525 credit builder account, there is a $1.25 late fee.
- For the $545 credit builder account, there is a $2.40 late fee.
- For the $1,000 credit builder account, there is a $4.45 late fee.
- For the $1,700 credit builder account, there is a $7.50 late fee.
How to Open a Self Account
It takes less than five minutes to complete the application.
To sign up for a Self account, you’ll need the following information:
- A bank account, debit card, or prepaid card is required.
- Contact information via email
- Number to call
- Number assigned by the Social Security Administration
- Be a legal permanent resident of the United States with a physical address in the United States.
- You must be at least 18 years old.
They advise starting the process with a linked bank account for automatic monthly payments. If you pay with a debit card, there will be a convenience fee of $0.30 plus 2.99% of the payment amount.
Self Advantages and Disadvantages
- Improve or build your credit score.
- Invest in a CD to grow your money.
- Choose from four different loan/CD amounts.
- It is not possible to withdraw funds until the loan has been paid in full.
- You can’t put your account on hold for a short period of time.
- It’s possible that you’ll be penalized if you leave too soon.
Should You Join Self if You Want to Improve Your Credit?
Self is a great credit builder if you don’t have enough cash to put down on a secured credit card or a qualified and willing co-signer to cosign a loan.
Even though there is an activation fee and an APR, you will own the fully funded CD at the end of the 12 or 24 month loan/CD term. Meanwhile, your payment reports are received by all three major credit bureaus–Experian, TransUnion, and Equifax–building or improving your credit score.
In a real sense, Self aids you in improving your credit score as well as your savings. And, because those are two financial situations that frequently coexist, Self will allow you to take control of both at the same time.
The main disadvantage of Self is that you can’t withdraw once you’ve started the program unless you can fully pay off/fund the loan/CD. Otherwise, you’ll have to keep paying monthly until the plan is finished in 12 or 24 months. As a result, even though the activation fee and APR are slightly higher, a 12-month plan may be the best option.
Visit the Self website for more information or to sign up for the service.