If you have no credit or — worse — bad credit, establishing a good credit reputation can seem impossible, because no one will approve you for a card or loan.
You can use a co-signer, but that involves risk for the co-signer. You could try a secured credit card, but you have to have money for the deposit.
But credit-builder loans, like those offered by Self Lender, offer consumers a chance to build or restore credit without requiring money upfront.
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.” But Self Lender is the first such product that’s widely available online. Loans are open to U.S. residents in all states except New York, Wisconsin and Vermont.
Credit-builder loans vs. secured cards
With a credit-builder loan, the amount you borrow does not come to you right away. Instead, it’s held until you make all the payments and then released to you.
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 have to pay a deposit up front, 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.)
How do you decide between a credit-builder loan and a secured credit card? You don’t have to. You can use both.
“Having both types of credit, revolving and installment, can help build your scores faster,” says NerdWallet personal finance columnist Liz Weston. “The scoring formulas like to see that you can handle different types of credit responsibly.”
How Self Lender works
Once you’re approved by Self Lender, the loan amount is deposited in a certificate of deposit with the firm’s partner, Austin Capital Bank. You’ll make regular payments for a year, then get access to the money.
Self Lender offers one-year terms and three choices of loan amounts — $550, $1,100 or $2,200 — with monthly payments of $48.50, $97 or $194. Which should you pick? “There’s no need to borrow the maximum,” says Weston. “The larger loan amounts won’t build your score any faster.”
You’ll pay a $12 administrative fee regardless of the amount you choose to borrow.
Over the term of a $550 loan, you’ll pay $48.50 per month at an interest rate of 10.57%. The money is deposited in a CD, where it earns 0.10% interest. That’s a total of $31.36 you’ll pay in interest, and you’ll earn a little more than 50 cents in interest on the certificate of deposit. That means you’re spending about $31, plus the $12 administrative fee, to see the beginnings of a good credit score.
When the loan is paid off, you have access to the $550 on deposit (plus the interest you earned). That could be the start of a great emergency fund, and Self Lender will encourage you to keep salting away that $48.50 a month, either in a higher-yield CD or a savings account at its partner bank.
During the repayment period, you have access to free credit monitoring and a VantageScore produced by TransUnion, 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 credit report information, updated weekly, with NerdWallet.
Self Lender reports your payments to the three major credit reporting agencies. Note that 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.
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.
How to apply for a Self Lender loan
The loan application is submitted online via Self Lender’s website. The loans are open to U.S. residents except in New York, Wisconsin and Vermont.
To qualify, you must be at least 18 years old and have a Social Security or taxpayer identification number. You’ll also need either a bank account or debit card, and a prepaid card is OK — a traditional bank relationship isn’t a requirement. You can’t have had a negative ChexSystems report, such as bounced checks or unpaid fees, in the previous 180 days.
Self Lender fees and penalties
Payments 15 days late or more incur a fee of 5% of the scheduled monthly payment. They are not reported late to the credit bureaus until they are 30 days late. 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 late payment can damage your credit, and a default is even worse.
There is no early termination fee.
An option for building credit
While online credit-builder loans are relatively new, credit-builder loans have a long history, but they aren’t always easy to find. While some credit unions and community banks offer credit-builder loans, you may need to meet additional criteria, such as living in a certain geographic area or having been a member for a certain amount of time.
Whether you use Self Lender or a credit union’s credit-builder loan, building credit by saving money rather than spending it leaves you with a nest egg and a habit of tucking money away. That’s a smart way to start your financial life.
Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.
Updated March 14, 2017.
