Strong personal and business credit scores can help small business owners qualify for better financing which, in turn, can help them grow their business. But not every entrepreneur can afford to wait until their credit is in perfect shape before they launch. Some have damaged credit due to financial setbacks, while others may have avoided debt and have very little credit history.
That’s where Self Lender may help. It offers a low-risk way for entrepreneurs to add a positive credit reference to their credit reports, without the temptation of running up balances on credit cards.
Who May Benefit
Self lender isn’t specifically geared toward business owners and it doesn’t build business credit. (To build business credit you need accounts that report to commercial credit agencies.)
But many small business financing sources review the owner’s personal credit scores, including most small business credit card issuers. And the FICO SBSS score, which is used to pre-screen applications for one the most popular SBA loan programs, takes into account the owner’s personal credit along with business credit information. So for many entrepreneurs, personal and business credit are closely intertwined.
A survey by Nav found almost 40% of its small business customer base were “credit ghosts,” and had so little credit history that getting financing could be difficult. Self Lender can be a way to help develop a more robust credit history.
It may also be helpful for those who want to start a small business in the future. One of these accounts can provide a disciplined framework to build credit while creating a small savings account that can then be used to help cover the cost of basic start up tasks that can help get a business off the ground. (Here’s a checklist of 14 steps to make your business legitimate.)
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How It Works
Self Lender offers “credit builder” accounts. This means you essentially “borrow” a CD (in this case, a FDIC- insured certificate of deposit bank account) and pay for it by making 12 or 24 monthly payments. At the end of that time period, you have full access to the money in the savings account, plus a credit reference on your personal credit reports with Equifax, Experian and TransUnion.
Self Lender will conduct a “soft inquiry” into your credit when you become a member so that it can provide free credit monitoring. Soft inquiries do not affect your credit scores. In addition, the bank that Self Lender partners with will conduct a credit check with ChexSystems, which collects and reports information about closed checking and savings account. (You can check your Chexsystems report here for free.)
Monthly payments made on your Self Lender account will be reported to all three major credit reporting agencies. Payments that are more than 30 days late will be reported as late payments so you want to pay your account on time, just as you would with any other account that can impact your credit.
A credit builder loan can be a complement to a secured credit card, which is another way to add a credit reference to your credit reports. Self Lender accounts are categorized as “installment loans,” which is different than “revolving accounts,” which is the category credit cards fall under. Having different types of credit accounts can impact the “credit mix” factor which makes up about 15% of credit scores.
You can start your credit builder account with Self Lender with just $25 a month, but you can also choose monthly payments of $48, $89 or $150. The payment period for a $25/month account is 24 months, while the others require payments over a 12-month period. The larger your monthly payments, the more you’ll have in your savings account at the end of your repayment period.
There is a non-refundable administrative fee of $9—$15 when you open your account. The APR ranges from 12.03%—15.65%.
The site offers an easy-to-use calculator that will help you understand the cost of your loan. For example, let’s say you want to make monthly payments of $48. After twelve months of making those payments, your savings account will be worth $545 and you will have paid Self Lender a total of $576 ($46 in finance charges includes the $15 administrative fee.)
Here is a screenshot of the example above from the Self Lender website on June 29, 2018:
Self Lender offers consumers and business owners a reasonably priced option for adding a credit reference to their credit reports—a savings account at the end is an added perk. Business owners who could benefit from building out their credit history may want to look more closely at this option. As with all accounts that appear on credit reports, paying on time is critical for maintaining a positive payment history.
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