It sounds weird to admit this but I built my credit when I was in college thanks to credit cards that offered free stuff for signing up.
I first applied for a Citibank credit card when I was a freshman. At the time, credit card companies were notorious for setting up booths on college campuses and gave away card-branded swag, like orange shirts and pens. Hey, I was broke and it was free.
My card had a $500 limit and like the typical 18-year-old, I maxed it out pretty quickly. However, I had a part-time job and was able to pay off the card, even though I only made minimum payments and it took me a while to get the balance to zero. (Oh, the things I wish I could tell the younger me!)
By the time I graduated, my credit was established and I was able to open a second card from Bank of America with a heftier $2,000 credit limit. I had two cards under my name and without even realizing it, built good credit for myself.
Establishing Good Credit With Self Lender
Times have changed since I was in school — for one, credit card companies are banned from setting up booths on college campuses, and two, not having a credit card seems to be a trend these days.
Credit is sort of like a Catch-22. You need to have established credit in order to get more of it, but how do you get it in the first place? What about bad credit?
What is Self Lender?
This is where Self Lender shines.
The company helps you establish good credit by setting up a CD account for you using funds from a small loan that you take out. You make payments each month to pay off the loan, and access the funds in the CD. Then, payments are reported to the credit bureaus each month.
It’s free to sign up, but there are interest fees you’ll have to pay, which is worth it if you need to improve your credit.
In a nutshell:
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- Self Lender is a tool that you can use to help build your credit history and savings at the same time. However, keep in mind everyone’s credit situation is different and they don’t guarantee you’ll see an improved score.
- Self Lender provides a path for consumers to open a small loan with one of their banking partners. The funds from the loan are placed in an FDIC insured CD in your name.
- Each month, you make a payment towards your loan. Once the loan period is completed, the funds placed in the CD become available.
- Monthly payments are reported to the credit bureaus by Self Lender’s banking partners. Responsible monthly payments help you build credit history, which impacts your credit score.
How Self Lender Works
Self Lender is a reputable credit-building company that helps you improve your score by providing a way for you to establish positive payment history.
They are essentially a free credit monitoring company that also offers a Credit Builder Account, which is a low-cost loan that you make to yourself. Yes, that’s right, to yourself.
You use it to funnel money into a CD each month.
You’re essentially being forced to make payments each month into a savings plan, and at the end of your term, you receive the money in a lump sum and have an improved credit score to boot.
The idea behind Self Lender is awesome because it allows you to save money while you’re building your credit. Sure, you can turn to a secured credit card and put down a cash deposit as collateral, but doing it that way means you’re spending, rather than saving.
What Should You Do if You Have No Credit Cards?
If you’ve always avoided credit cards because you didn’t want to deal with going into debt, you may not have any credit. This means that “adulting” (i.e. buying a car or house) may be challenging.
(Don’t worry, this article isn’t going to give you a lecture about why you need a credit card, because you don’t, thanks to Self Lender.)
Even if you think you’ll be a renter for life, having good credit is helpful — it may be the deciding factor for a landlord to choose between you and the other potential tenant. Or it may be the main reason you were rejected.
Dealing With Bad Credit
Something went terribly wrong and now your credit is messed up. How do you improve it, besides making on-time payments each month? Plus, what if you’re in a hurry and need to improve it a lot faster?
Self Lender addresses this issue and helps people build credit through paying into a savings plan.
These are a few ways to improve your score, but each method has its disadvantages (this is detailed in the last section, “How to Build Your Credit Without Paying for It”).
- Get added to someone else’s credit card account as an authorized user
- Caveat: The credit card holder needs to have good credit, and there’s always that chance they may say no to your request).
- Open a secured card (you need to put down a cash collateral to use as your line of credit)
- Caveat: If you don’t have a lump sum of cash, then this isn’t an option for you.
- Report your on-time rent payments
- Caveat: This is contingent upon your landlord.
Self Lender helps you control your credit situation, and it’s a pretty straightforward process.
Maybe you want to buy a house in the next few months or want to get a rewards credit card — whatever the reason is that you need credit, Self Lender can help.
What If You Have Bad Credit?
If you have bad credit and want to improve it, a Credit Builder Account may be your only option.
Self Lender helps you improve your score if you’re dealing with bad credit because they don’t run a hard inquiry credit check. However, Self Lender does want to know if you have any checking accounts that may have gone to Chexsystems or were fraudulently shut down.
What to Expect When You Open a Credit Builder Account
When you first open an account, you take out a small loan that is used to open a CD (Certificate of Deposit). You can choose a CD size of $525, $545, $1,000, or $1,700.
A CD is a type of savings account that earns interest on the money you save. A CD is different than a regular savings account in that you aren’t allowed to touch the money until the term you choose is over.
So, if you have a CD through Self Lender that will mature at 12 months, you will earn a certain interest rate for a year, but any time before that you won’t be able to touch that money without paying a fee.
In order to get started you will need to have:
- A bank account, debit card, or prepaid card
- Email address
- Phone number
- Social security number
You must be:
- At least 18 years old
- Be a permanent U.S. resident with a valid address
Note: If you use a debit card, you will be charged a convenience fee of $0.30 + 2.99%. In order to avoid that fee, link your bank account.
This is how it works:
1. Pick your account
First, choose which credit builder account you’d like, and the term (12 months or 24 months)
2. Make your payments
Then, you make a monthly payment into the CD for 12 months. The payments are then reported to each of the major credit bureaus which means your credit hisotry is slowly improving with each on-time payment you make.
3. Wait and watch your credit score go up
According to their site, Self Lender customers can expect to see their scores raised by 30 to 60 points within a three-month period. (Keep in mind, every customer’s situation is different and outcomes may vary because of that.) Conversely, if you don’t make on-time payments, it will be reported to the bureaus as well, so make sure this doesn’t happen.
4. After the CD term, you have a lump sum of money
After the one year has passed, you have basically saved money in a CD that matures. Because of the fees involved with Self Lender, the interest that you earn on the CD will be negligible, meaning, what you would’ve earned will be canceled out because of the fees.
Remember the goal is to improve your score, not to earn interest on the CD.
You can take that money you save at the end of your term and roll it into another CD, or use that money to pay off debt.
Fees Involved With Self Lender
Self Lender helps you bridge the gap between no or bad credit to good credit, so of course, this service isn’t free. However, Self Lender makes the numbers transparent, and it’s easy to see how much you’re paying vs. how much interest and fees you’re shelling out.
At the time of writing, you’d have to pay an interest rate that starts at 10.69% to 13.16% and there are activation fees involved as well ($9 to $15). Self Lender offers loan terms anywhere from 12 months to 24 months. Check their site for the most current rates.
Here is an example of how much the lowest-tiered credit builder account costs:
- Monthly payment: $25
- How many months: 24
- Activation cost: $9
- Your cost total: $609
- What you get at the end of your term: $525 plus CD interest
Which Credit Builder Account Should You Pick?
Self Lender recommends that you pick an account that best matches your budget for the next year or two. Choosing a larger credit account builder won’t necessarily mean you’ll be able to improve your credit score faster.
Credit 101 for Your Brain
There are actually hundreds of credit scores that are used by lenders, but the one from Fair Isaacs Corporation, or FICO, is the popular one because many lenders use it. The other credit scoring model that is well-known and widely used is VantageScore.
You’re probably familiar with FICO, which is a type of credit score widely used by many lenders.
3 Credit Bureaus
There are three main credit bureaus: Experian, Equifax, and TransUnion. Each bureau has a slightly different credit score model but they follow a general formula to give you your credit score.
Typically, your credit score is broken down this way:
- 35% – Payment history
- 30% – Credit utilization
- 15% – Average age of credit accounts
- 10% – Credit mix
- 10% – Inquiries or hard credit pulls
Why It’s Important to Check Your Credit Score Every Month
Every single account you’ve ever had is imprinted in the bureaus’ history, so it’s important to scan your credit reports each month for any type of accounts you don’t recognize — this could potentially point to identity theft.
Credit bureaus like Experian, Equifax, and TransUnion take information from everyone you’ve borrowed from or applied for credit from and compresses all of your payment history, current balances, and credit limits into a single number that is constantly being updated.
5 Credit Rules to Live By
Let’s go over the credit basics so you can build a solid foundation of how to use credit responsibly. Once you understand these rules, it’s smooth sailing.
You should always:
1. Pay your bills on time
There’s a reason why this accounts for roughly 35 percent of your credit score. Lenders want to know if you’re responsible and paying your bills on time every single month is a pivotal indication of that. I like to think of it in terms of lending your friends money.
If Joe Money borrowed $100 from you last month and said he’d pay you back the next but never did, you’d probably be upset that you didn’t get your money back and would never lend Joe any money again in the future.
2. Keep your credit utilization low
Credit utilization is the total amount of debt you have in relation to the total credit limits you have. In simple math, you’re dividing your debt into your credit limit.
For example, if you have two credit cards with a total limit of $2,000 (a $1,000 limit on each card) but spent $1,000, your utilization is 50 percent. Fifty percent is too high, try to keep this number lower than 30 percent. Ideally, keep it at 10 percent.
Even if you don’t have any credit cards, it’s good to understand the ins and outs of using them responsibly.
3. Don’t max out your credit cards
This goes back to keeping your utilization low and if you’re maxing out your card, your utilization will be pretty high.
Don’t even get close to maxing out your cards, and if you have a low limit or tend to fall down the slippery slope of spending too much on your credit, be sure to set alerts on your credit cards that tell you if you’re reaching your limit.
4. Pay off existing debt (or increase the minimum payments if possible)
If you have a lot of debt, pay off as much as you can each month. Also, make more than the minimum payments. Put a plan put in place for your debt and pay 10 percent or more each month. Steadily increase it each month if you can.
When you pay off your debt, you can lower your credit utilization, which, in turn, will help improve your credit score.
5. Check-In Regularly
Just like you would do for any other goals you have in life, make sure to schedule regular check-ins to see how you’re progressing.
This includes logging in to see your free credit score from Self Lender. Check in once a month to see how much your score has improved.
How to Build Your Credit Without Paying for It
There are ways you can improve your credit score without having to pay for it. This involves help from others.
Pros and Cons of Becoming an Authorized User
If you know someone with great credit, ask if you could become an authorized user on their credit card account.
The Pros: This could be a really easy way to “piggyback” off of someone who already has good credit. Once you’re added as an authorized user, use the card for small purchases. Then, pay it in full each month and on time.
The Cons: If you go this route, the other person needs to understand he/she is assuming financial responsibility for your actions. So let’s run through the worst case scenario. Perhaps you racked up $500 on their credit card but can’t pay it back.
This means the credit card holder will need to fork up that money. If your balance is left unpaid or missed, the card holder’s credit will suffer. This is why authorized users should be a thoughtful process. Both parties need to understand exactly what they’re getting into.
Pros and Cons of Getting a Secured Credit Card
The Pros: Make sure the card issuer reports your timely payments to all three credit bureaus.
The Cons: You can apply for a secured card but you need your own money to put up as collateral. If you don’t have access to a lump sum of cash, you won’t be able to get a secured card.
Pros and Cons of Adding Rent Payments
The Pros: This is an easy way to improve your credit score, given you make on-time rent payments every month.
The Cons: You need to ask your landlord to report your on-time rent payments. This is contingent upon your landlord and whether they are open to doing this.
If you live in a building managed by a property management company this may not be an option.
Building good credit doesn’t happen immediately.
Just know that if you’re responsible, make on-time payments, and keep your utilization low, your score will go up. If you want some extra help getting there, consider using Self Lender.
What’s the best way you’ve improved your credit score?