Self Offers Credit-Builder Loans Without Money Upfront

If you have no credit or damaged credit, it can be challenging to get a credit card or loan.

You could try a secured credit card, but you typically have to have money for the deposit. But credit-builder loans, like those offered by Self, offer consumers a chance to build credit — or restore damaged credit — without requiring money upfront.

With a credit-builder loan, the amount you borrow doesn't come to you right away. Instead, your payments are held in a certificate of deposit, which is insured by the Federal Deposit Insurance Corp. Once you've made all the payments, the money is released to you.

Company co-founder and CEO James Garvey says he wanted to "create a simple way to establish credit history for the first time." He noted that credit-builder loans, long offered by some credit unions and community banks, “have been proven to help people establish credit history.”

Loans from Self are open to U.S. residents in all 50 states.

How Self — formerly Self Lender — works

Once a loan application is approved by Self, the loan amount is deposited in a certificate of deposit with one of its partner banks. You’ll make regular payments over the life of the loan. After all payments are made, you get access to the money minus the finance charges (the administrative fee and the interest you are charged). If you decide to close your account before it’s paid off, you can access the money in the CD, minus the amount you still owe.

Self offers one- and two-year terms, depending on what you want your monthly payment to be. The lowest payment is $25 a month; you can also choose payments of $35, $48 or $150 per month. The nonrefundable administrative fee can vary but tops out at about $15. The APRs for Self loans do not exceed 16%, according to the company.

Self reports your payments to the three major credit bureaus. Any late payments will hurt the credit you are trying to build. After about six months, your repayment activity should generate a FICO score if you didn’t already have one; your VantageScore can be generated sooner.

A larger loan won't help you build your score significantly faster. Be sure to pick a payment amount that is comfortable. A late payment could hurt your credit, and that’s the last thing you want.

During the repayment period, you have access to free credit monitoring and a VantageScore produced by Experian so you can track your credit score’s progress. If you want to keep an eye on your credit after the loan period, you can get a free credit score and TransUnion credit report from NerdWallet.

How to apply for a Self loan

The loan application is submitted online. To qualify, you must:

• Be at least 18 years old.

• Be a permanent U.S. resident.

• Have a Social Security number.

• Have either a bank account or debit card; a prepaid card is OK.

You can’t have had a negative ChexSystems report, such as bounced checks or unpaid fees, in the previous 180 days.

Credit-builder loans vs. secured cards

A credit-builder loan is different from a secured credit card in two important ways:

• You don’t need money upfront to get the loan, though you do need to be able to afford the monthly payments. With a secured card, you typically have to pay a deposit upfront, and that amount is generally your credit limit.

• You cannot access the money on deposit until the loan is paid off. With a secured card, you can use up to your credit limit anytime — though doing so will increase your credit utilization and hurt your credit until the balance is low again.

Self offers a related secured credit card

Self now offers a Visa credit card secured by money you have paid on your Self loan account. To qualify:

• You must have made at least $100 worth of payments on your loan.

• Your account must be in good standing.

• Your last three payments must have been made on time.

The card has an annual fee of $25, and that amount is subtracted from the money you have on deposit when you get the secured card. If you open the card with the minimum $100, that means your credit limit could be as low as $75. You can choose to have a larger deposit secure your card, which gives you a larger credit limit.

There's no credit check, and — like the loan — the secured card reports your payments to the three major credit bureaus.

That gives you two types of credit: revolving (the credit card) and installment (the loan). That could help build credit faster because the scoring formulas like to see that you can handle different types of credit responsibly.

Self loan fees and penalties

Payments 15 days late or more incur a fee of 5% of the scheduled monthly payment. Payments that are 30 days or more past the due date will be reported to the credit bureaus, likely damaging your score.

If the account continues to be late, it will eventually be closed and the loan will be reported as "defaulted" on your credit reports. You get the loan deposit amount, minus the fees and amount you owed when the account closed. A default also damages your credit.

Self vs. Kikoff

Kikoff is another online lender that offers a credit-builder loan for people who want to establish credit. Kikoff offers only one loan amount ($12), and there's no credit check, interest charge or fees involved. Your 12 monthly payments of $1 each are reported to the credit bureaus, which helps build your credit record. The money isn't held in a certificate of deposit account.

Unlike Self, which lends in all 50 states, Kikoff doesn't lend in Delaware, Idaho, Indiana, Louisiana, Maine, Mississippi, Nevada, North Dakota or Rhode Island.

You can pay your loan back early at both lenders if you've established a good credit score and are ready to apply for traditional loans or credit cards.