Why Self Lender Isn’t Good For Building Your Credit
I didn’t really want to make this article because I know people are gonna hate on it.
But it’s not up to me to hold back on sharing what I think is beneficial to a lot of people just because a few people will get angry.
Building credit is a catch-22. You need credit in order to build credit. But it’s challenging to get approved for credit when you have poor history or no history at all.
If you’re unsure how to move forward, don’t worry—I got you. In this article, I’ll explain common ways to build credit and then share my recommendation for the best way to build credit.
Four Ways to Build Credit
Apply for a Secured Card
Secured credit cards are cards marketed to people with less-than-stellar credit. The card is “secured” by the money you put down upfront. You submit a deposit, typically ranging from $200 to $500. The card limit is often the amount of your deposit, which isn’t very high.
The deposit is returned to you if you close the account or if the credit card issuer upgrades you to an unsecured card. The goal here would be to use the secured card until you build up enough positive credit history to qualify for an unsecured credit card with a higher credit limit.
Plot Twist! All secured cards aren’t guaranteed approval either (Loud Gasp!)
Give Credit Piggybacking a Shot
Credit piggybacking is when you become an authorized user on someone’s credit card account that has a stellar payment record. The hope is that their card will show up on your credit history as well and it’ll positively impact your score.
But here’s the truth: This strategy doesn’t always work. Some credit card issuers do not report the account or payments to the bureaus for authorized users.
Also, just because your friend uses the card properly today, doesn’t mean they won’t max it out and miss a payment tomorrow!
Take Out a Credit Builder Loan
A credit builder loan is an installment loan product offered by some credit unions and online lenders. It works like a typical loan but in reverse. Instead of getting money on the front end, you get the money on the back end.
Loan funds are put in an account that you can’t touch. You make installment payments to pay off the loan, and each payment is reported to the credit bureaus. Once the loan is paid off, you get the funds in a lump sum.
Self Lender is a popular issuer of credit builder loans. There’s a $9 administrative fee to open an account. Payments may be as little $25 per month over 24 months, and payments are reported to all three credit bureaus.
Sign Up for a Revolving Credit Line
Having poor credit (or no credit) can make it challenging to qualify for unsecured credit cards from major banks. But there are credit opportunities outside of big financial institutions.
MyJewelersClub is an example of a company willing to offer a store credit line even to applicants with bad credit. You can immediately get approved for a credit line of up to $5,000.
What’s the best way to build credit?
The best way to build credit is one that has the lowest barrier to entry and will have the most significant impact on your credit score.
Keep words are the most significant impact on your credit. Let me explain (puts on my thinking glasses)
In the case of the secured card, you’ll need to put down cash upfront, and the credit line you get probably won’t be high (because you’re putting down your money).
Secured cards can also come with an annual fee and applicants with recent adverse credit history (i.e., collections or late payments) may not qualify (*cough* capital one *cough*.
For credit piggybacking, you’re going to need a rich auntie, uncle, mother or cousin with good credit to add you as an authorized card user. What if your rich relative says no? What if no one in your family has good credit? What if they say yes and miss a payment or overuse the card (that late payment hits your account)?
That leaves us with credit builder loans and revolving credit lines. Credit builder loans are decent and typically affordable, but they usually offer a very low loan amount and you don’t get access to money upfront.
Why choose MyJewelersClub over Self Lender?
Self Lender offers an installment loan of up to $1,700. Loan payments made over 12 to 24 months may improve the “credit history” and “Payment History” aspect of your credit score, but it doesn’t do much for the “amounts owed” aspect of your score.
Here are the five factors that impact your FICO score.
- Payment history – 35% of your score
- Amounts owed (credit utilization) – 30% of your score
- Length of credit history – 15% of your score
- Credit mix – 10% of your score
- New credit – 10% of your score
Or… to put it another way on a credit scale from 300 to 850
- Payment history – 192.50 points
- Amounts owed (credit utilization) – 165 points
- Length of credit history – 82.50 points
- Credit mix – 55 points
- New credit – 55 points
The amounts owed factor considers the percentage of your available credit that’s in use or unpaid. Since Self lender is an installment loan, it doesn’t register for the amounts owed category.
Also, chances are you don’t need a credit builder loan. Why? If you have a car note, student loan, or personal loan you already have something on your credit that does what Self Lender does!
Lastly, did you know that you score will most likely drop (at first) when you open a self lender account? Why? Well, when you add a new installment loan to your credit the score can dip significantly (nearly 60 points), but you will regain those points with 4-6 months of on-time payments.
However, most people never expect their score to drop when adding “good credit” but it does!
MyJewelersClub, on the other hand, gives you access to a credit line as high as $5,000 right away.
Keeping a low balance on this card and making on-time payments every month can give both the payment history and amounts owed (or credit utilization) factors of your score a boost.
This means you get to impact the 30% or 165 points that Self Lender doesn’t give you without the score drop!
Say you currently have two credit cards:
- Credit Card A has a $5,000 limit with a $2,500 balance
- Credit Card B has a $2,000 limit with a $1,750 balance
In this scenario, you’re using over 60% of your total available credit lines, which is high. (See how this is calculated below.) Ideally, you want your credit utilization to be 7% and under
Hint: The 30% rule is a LIE!!!! It’s really 7% and under if you really want your score to increase.
Now add the MyJewelersClub credit card into the mix with a $200 balance and a $5,000 limit. Your overall utilization will drop down to 37% thanks to the new much higher credit line.
Before the MyJewelersClub card
|Credit Card A||$5,000||$2,500||50%|
|Credit Card B||$2,000||$1,750||88%|
After the MyJewelersClub card
|Credit Card A||$5,000||$2,500||50%|
|Credit Card B||$2,000||$1,750||88%|
|My Jewelry Club||$5,000||$200||4%|
A positive payment history, coupled with a decrease in your credit utilization, will do wonders to your credit score.
The Bottom Line
Building credit doesn’t have to be hard—You just need to know the rules of the game. Secured cards and credit builder loans can work. But if you have a shot at getting approved for a high and unsecured credit line like the MyJewelersClub card, you should take it.
The only downside to the MyJewelersClub Card is that you need to buy something to get the card. The only thing I find tolerable is their G-Shock watch. I actually still have it from when my credit was 504 (it’s now 800+) and I wear it to the gym as a reminder of where I came from.
However, for about $99.99 you get a $5000 limit card to help snap your score up in 45 days and put you in position to get larger unsecured cards. Just remember, this is for credit building not credit using.
Remember… You’re playing the game, so you can reach your goals.
If you read this far… you’re awesome! I appreciate you and maybe we can hang out sometime in my YFS Academy.
Until next time,
Dominique “Haters Gonna Hate” Brown