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If you have bad credit or no credit, you probably feel like you’re stuck in a Catch 22. Traditional lenders won’t work with you because of your bad or nonexistent score. But you need loans and credit cards to improve your score. Luckily, some products can help you escape this trap. A credit builder loan through an online lender like Self is one of them.

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What is a credit builder loan?

Credit building loans are installment credit, which means you borrow a set amount that you pay back with fixed payments. Unlike traditional personal loans, you don’t receive the money upfront. Instead, it’s held in an account until you pay the loan off.

Once you make all the payments, you receive the money you borrowed, minus fees. The lender reports the payments for the loan to the credit bureaus. As long as you make all the payments on time, this helps you build a positive payment history. Thus, you improve your credit score – hence the name.

Earning something back with a credit-builder CD

With some builder loans like Self, you earn money on the amount you borrow. Self uses the funds you borrow to open an FDIC-insured Certificate of Deposit (CD) with one of their banking partners. The CD earns interest over time as you pay the loan back.

Once you finish making payments, the CD matures and unlocks. You receive the principal back plus the growth from the CD. Of course, the loan itself has some costs – a $15 administrative fee, plus interest charges. So, don’t expect to see the savings and growth that you would see with a normal CD. Instead, the growth of the CD offsets a portion of the interest charges on the loan.

Self logo

How Self’s credit builder account works

  1. Download the Self app for free from the App Store or Google Play Store.
  2. Create an account or sign up through Facebook; you can also do this online.
    1. First, you’ll enter your name and email, as well as mailing address
    2. Then it will ask for your Social Security number and birthdate to verify your identity.
  3. Choose the loan amount based on the monthly payment you can afford
    1. Options are $25, $35, $48, and $150
    2. If you choose a $25 or $35 payment, the term will be 24 months; if you choose $48 or $150, then the term is just 12 months
  4. Read through the explanation of fees and finance charges.
    1. Self has a nonrefundable administrative fee that ranges from $5-$15, depending on the loan amount and when you sign up.
    2. APR on the loan ranges from 14-16% APR.
    3. Make sure to note how much money you will receive back versus the total amount of payments.
  5. Apply for the loan, consent to the electronic disclosure, confirm if you’re active-duty military.
  6. Review your application
    1. Now they will tell you the APY (annual percentage yield) of the CD, which should be around 0.10%.
    2. It will also let the date that the CD will mature and unlock – i.e. when you can access your funds.
    3. Confirm you are a U.S. citizen or permanent resident.
    4. Agree to the terms and conditions
  7. Link your bank account or debit card
    1. If you’re using your bank account, you’ll need the routing and account number.
    2. If you’re linking your debit card, you’ll need the card number, expiration and security code.
  8. Decide if you want to set up Autopay (recommended) and Accept the Loan.

Using other features from your Self dashboard

Once you’ve accepted the loan, Self will take you to your dashboard. This will show you:

  • Your savings progress, which starts at $0.00
  • The date of your next payment
  • Confirmation of Autopay enrollment

You can also set up the dashboard to show you your credit score. Simply answer a few security questions to reconfirm your identity. Then Self will show you your Experian VantageScore 3.0 automatically anytime you log in.

What happens once you complete the payments?

At the end of the payment schedule, you will receive an email notification that your CD has matured. After 10-14 business days, Self will send you a check. That’s currently the only option available in their system.

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How these loans help you build credit

Self and most other credit-building lenders report to all three major credit bureaus in the U.S. (Experian, Equifax, and TransUnion). This means every on-time payment that you make helps you build a positive payment history using this loan.

Since payment history accounts for 35% of your credit score calculation, this can be a big help. If you have no credit, you’ll start racking up the positive payment history to show you have experience with credit.

Even if you have bad credit, this new positive history will help offset negative items you may have, such as missed payments on other accounts. The “weight” of negative information on your score decreases over time. So, positive actions now will outweigh past mistakes.

A credit building loan will also help improve the number and types of accounts that you have. These are minor factors used in calculating your score, but they can still give you a little boost. Having a mix of loans and credit cards shows you know how to manage a diverse range of accounts at the same time.

Does a credit builder loan negatively affect your credit in any way?

At least for Self, setting up this account will not negatively affect your score, if you make all the payments on time. Creating an account with Self does not create a hard inquiry on your credit report. That means you won’t lose a few points off your score for approving a credit check.

Self also doesn’t hurt your credit utilization ratio. Since you don’t receive the funds from the loan upfront, you don’t increase the total debt load you carry. And unlike a secured credit card, there’s no balance that you can run up, which can drive your ratio up.

The only way a Self loan will hurt your score is if you miss a payment by more than 30 days. Any loan or credit card payment that’s more than 30 days late creates a negative item in the payment history of that account. It’s the same with Self. Just like traditional lending products, credit builder loans will hurt your credit if you can’t keep up with the payments.

Other places you can get a credit builder loan

Self isn’t the only place you can get one of these loans, although we think it’s one of the easiest. Credit unions and small community banks usually offer them as well. If you go through a credit union, you may need to meet certain requirements to become a member. Community banks don’t have those limitations

You can also look for a Community Development Financial Institution (CDFI). These are banks and credit unions that specifically focus on serving people who get turned down by traditional institutions. If you’re “unbanked” or “underbanked” and don’t even have a checking account, a CDFI may be willing to help you. Nerdwallet has a handy list of CDFIs by state.

One last option is to find a funding circle in your local community, also known as a lending circle. A group of adults in your community each contributes a set amount of money each month. Each month, one of the members of the circle gets the money from everyone else.

For example, if there are 11 people in your circle, you donate $100 for 10 months. Then one month, you receive $1,000 from the other 10 people. You can find local lending circles and set them up through

If you’re getting a loan through one of these sources, follow these tips:

Make sure that the lender reports to all three credit bureaus

Not all lenders report to every bureau. Some credit unions and smaller banks often only report to one or two. That will only help you build credit through those bureaus. So, you want to make sure the lender reports to all three, so you get the full benefit of building.

It’s worth noting that any lending circle set up through Mission Asset Fund will report to all three bureaus. However, not all lending circles are officially registered. Make sure yours is before you commit to joining the circle.

Check APR, APY, and fees

You need to know exactly how much the loan will cost and what you will get back once you make all the payments. This means you need to know:

  • What fees will apply when you take out the loan
  • The annual percentage rate (APR) applied to the loan
  • Total finance charges

If you get a Certificate of Deposit (CD) when you take out the loan, you also need to know the annual percentage yield (APY). That’s the amount of interest you earn on the CD. This will offset the cost of the loan, meaning you get more money back at the end.

Understand the term and monthly payments

If you receive your loan through a financial institution, then you will receive a Truth in Lending disclosure. This will detail the number of payments and the monthly payment amount. It will also show you the date you will complete the payments and expect to receive your funds.

If you go through a lending circle, make sure you understand:

  • the monthly payment amount
  • number of rounds/people participating
  • when it will be your turn to receive the funds

Check with financial institutions about hard inquiries

Using Self or MAF lending circles will not create any hard inquiries on your credit report. However, if you’re going through a credit union, bank or CDFI make sure to check if they require you to authorize a credit check. If they do, this will create a hard inquiry on your credit report.

Smart uses for builder loans

Get started with Self today to start building and funding your next big purchase or project the smart way.

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Article last modified on August 18, 2022. Published by, LLC