45 million Americans have no credit history.
We want to change that, which is why we’ve made it our mission to help people build credit – particularly those who are new to credit or might not have access to traditional financial products.
Right now, we do this through offering our Credit Builder Account – an installment loan that enables people to build payment history while saving money.
However, while a Self account can be a great fit for a lot of people, we recognize that it’s not the right fit for everyone.
Yes, that’s right. We said it.
Our product might not be the right fit for everyone. As such, we wanted to put this guide together to help you find out if it’s the right fit for you.
So without further ado, here’s who should probably not get a Self loan.
This can be a tricky one, because it depends on your situation. Generally, the industry standard is to keep the amount of credit you owe to 30% or less than your total available credit limit. This utilization ratio factors into the amounts you owe, which makes up 30% of your FICO credit score.
There are essentially two types of credit utilization ratios – your revolving credit utilization and your installment loan utilization. While you can review your credit report (you can get up to 1 free copy per year from AnnualCreditReport.com) to determine the overall amount of credit you use, you could also do this by hand if you felt so inclined.
You can calculate your credit utilization ratio by adding up all your current credit used and dividing it by the total amount of your available credit. The same formula works for installment utilization too. Just add up all your current loan balances and divide them by the original loan amounts to get your installment loan utilization ratio.
If you’ve done the math or reviewed your credit report and the ratio looks pretty high, then opening another installment loan (such as Self) could raise your ratio – and lead to a reduction in your credit score.
However, once you pay your Self loan down, the positive payment history and reduction in credit utilization could positively impact your credit score. So make sure you take a look and weigh the pros and cons here before taking further action.
First of all, congrats on getting to your good credit score in the first place! Before you sign up, make sure you review your credit profile and determine if adding another installment loan would help – or possibly hurt – your current credit profile.
If the issues holding you back from stellar credit include needing to build more positive payment history, or needing an installment loan to diversify the types of credit you’re using, then a Self credit builder loan could absolutely be the right fit for you.
For example, if you recently paid off a car loan and no longer have that type of loan on your credit report, then the Self loan could be exactly what you need to keep your credit going strong.
However, if you simply have too much debt, for example, it could be more beneficial for you to just pay down your existing debt.
Again, the answer you’re looking for could be found just by reviewing your personal credit report.
Your payment history makes up 35% of your credit score. In other words, it is the largest factor in determining your credit score. So if you don’t make your payments on time and in full, you’re only hurting your score.
If someone is not able to make payments on time – and in full – for any reason, they should not get a Self account. The hope with a Self account is to build positive payment history that gets reported to all three major credit bureaus.
However, legally we are required to report accurate payment history – not just positive payment history – to the credit bureaus. So if you don’t make payments, then you’re just building negative payment history. Meaning that your late or missed payments are what’s getting reported to the credit agencies. And that’s not the type of credit history that would improve your credit score.
We try to help you develop good payment habits, but it’s up to you to take advantage of the resources we offer and make your payments on time. Here are just a few of them:
So make your payment as soon as possible to avoid any late fees or negative late payments showing up on your credit report.
Ultimately, the Self credit builder loan is just a tool. It’s really about how each individual uses that tool that can make or break how it helps their credit.
It’s hard to promise anything when it comes to credit, since your credit report is nearly as unique as your fingerprint and each credit reporting agency has its own algorithm(s) for generating your credit score. But there is some anecdotal evidence that suggests that having too many installment loans could have an adverse effect on your credit. Especially if your remaining balances are high.
However, keep in mind that as you pay those balances down, you’re also building payment history and reducing the total amounts you owe), which could have a positive impact on your credit.
Let’s break this down and provide a little context so you can make the best decision for yourself on this one.
There are two types of credit that appear on your credit report:
Revolving credit is a line of credit that, as long as you continue to manage it responsibly, keeps rolling over until you close the account. An example of this type of credit is a traditional, unsecured credit card.
An installment loan is a loan for a set amount of money that is paid in monthly installments and charges interest. Examples of installment loans include:
It’s important to have both types of credit on your credit report. A healthy credit mix accounts for 10% of your FICO credit score. If used well, having a good credit mix demonstrates to lenders your ability to responsibly manage different types of credit, and can make you more desirable for future loans and credit cards.
If you already have an installment loan that you pay off in full and on-time monthly and have positive payment history for, then you might not need Self. If your credit mix looks good, and your payment history looks good, it could be helpful to consider other factors that impact your credit score.
Now that we’ve covered the basics of who might not benefit from a credit builder loan, let’s talk about the people who should consider getting a Self loan.
__The Self account can be helpful for: __
The bottom line is simple – just like with any other product out there, Self can be a great fit for some people, and a not-so-great-fit for others. Like any tool, it’s really about how you use it.
So before you sign up, we encourage you to take a look at your current credit situation so you can make the best decision for yourself and for your personal financial future.
Lauren Bringle is an Accredited Financial Counselor® and Content Marketing Manager with Self Financial – a financial technology company with a mission to help people build credit and savings.