By David Gasch
Most people aren’t credit experts. Yet credit affects all our lives and navigating through the information out there can be overwhelming. If you’re like me, you may not have known how to build credit for the first time or how to make the right choices to improve your credit situation if you’ve made some mistakes.
Then I found Self and that all changed. Since being welcomed to the Customer Success team, I’ve had the pleasure of working with customers every day to help them establish their credit history and make sense of how credit works.
While the concept of a credit builder loan isn’t new, we are the first company to offer them online or via our mobile app in all 50 states. Since we’ve changed the delivery model for this product, it raises a lot of questions. I wanted to take just a moment to respond to some of them.
Here are five of the most common questions I get from customers, along with some answers.
Self offers the Credit Builder Account to provide a safer and more flexible way to establish credit history than traditional forms of debt such as personal loans or credit cards.
The program serves two main purposes:
Though our customers essentially lend money to themselves, there’s a little bit more going on under the hood. The Credit Builder Account is made up of two main components, an installment loan and a Certificate of Deposit (or “CD”). The loan funds are held in this CD throughout the term as the customer pays back the installment loan.
We understand our customers come from all walks of life, and everyone’s financial situation is unique. Which is why, when you apply, you choose a monthly payment from one of Self's pricing options. The program is designed to help you build payment history, which is the largest factor in determining your credit score.
However, this means it’s important to choose a payment option that best fits your budget and unique lifestyle, so you can make your payments on time and in full every month.
Each month, you make your payment and we report to all three credit bureaus that we received your payment and the account is current. Once the term is over and the loan is paid in full, you have established new payment history on your credit profile. We then send the principal loan amount back to you.
The Credit Builder Account provides a way to establish credit history and build savings at the same time. The installment loan portion is what allows us to report to the three credit bureaus each month.
An installment loan is a loan you pay back in monthly “installments.” It can also help add to the types of credit that appear on your credit report, which counts for 10% of your FICO credit score.
Unlike a traditional personal loan, the installment loan in the Credit Builder Account is secured in a CD (certificate of deposit) for the full length of the term, and you receive the CD funds after the program is complete.
Our goal is to offer a safe, responsible way to build credit and diminish the potential for negatively impacting your credit. Unlike personal loans or credit cards, you can close the account before you fall behind if you experience hardship or feel you may be unable to make payments moving forward.
If the loan is closed in good standing, meaning all payments to that point have been made and there are no outstanding late fees, we will then report the account as completed and paid in full to the credit bureaus. This is the same report we would send if you completed the program.
Everyone’s credit profile and history are unique. While we submit your payment history each month to all three credit bureaus, each credit bureau processes the reports on a different timeline and determines how and when to show the information on your credit report.
Because of this, we cannot provide an exact estimate for how the program will affect your credit or guarantee your score will improve.
Any time you open or close a credit account, your score may fluctuate because the total amounts you owe, which counts for 30% of your credit score, just increased (or decreased). Basically, since you added another loan you need to pay down to your existing credit lines, the amount you owe will be higher initially. Once you start making payments though, the amount you owe should start to go down, and you’ll build payment history along the way.
Remember, payment history makes up 35% of your credit score, which is the largest portion of your score. However, many factors are considered to determine your score. These include the number of open accounts, total debt, the average age of accounts, etc. New credit history will affect everyone differently.
While these are just a few of the most common questions I get on a weekly basis, I understand you might have more. If you do, feel free to check out our FAQs, keep reading our blog, or reach out and contact us directly if you need something more specific.
David Gasch is a writer and IT Support Specialist at Self (see David Gasch on LinkedIn). He has a background in communications and media production. When he's not helping people build credit or helping customers, David enjoys hiking, cooking and exploring Austin.