You have committed to improving your bad credit by opening a Self (formerly Self Lender) credit builder account and are excited to see your credit score begin to rise. But the first time you check your credit score, you find out that it has actually decreased.
Wait, what happened here?
While a credit builder loan like the one Self offers is designed to help you improve your credit, opening the account can actually drop your score, thanks to impacts on your average age of accounts, credit utilization, and payment history.
The good news? Drops to your credit score that result from opening a Self credit builder account are usually temporary.
Why a Self Credit Builder Loan Could Have Dropped Your Credit Score
It may seem illogical, but opening a Self credit builder account can actually drop your credit score. Why this happens and how much your credit score will drop, depends on your unique financial situation.
The good news is that most of the reasons why your credit score may drop are temporary. For instance, opening a new credit account almost always drops your credit score as it shortens your average age of accounts.
Unless this is your first-ever credit line, which means your score can only go up.
The unfortunate fact is that each person’s credit score is made up of various factors which are all weighted differently. This is why some people may see a huge dip in their credit score when opening an account with Self, and others only ever see their credit score rise.
To better understand the negative impact having a credit builder account can have on your FICO score, let’s explore 5 of the most common reasons for a credit score decrease.
A small part of each person’s credit score is built by factoring in new credit. New credit in the FICO scoring model is defined as a hard inquiry, otherwise known as a hard pull.
If you have no recent hard credit inquiries (within the last 2 years), then the new credit part of your score is at its highest. The more new credit lines you apply for (not necessarily open), the lower this portion of your score will be.
The good news here is that Self does not perform a hard pull on your credit for the credit builder loan or their secured credit card. So opening a new account from Self will never ding the new credit part of your score.
Where this new credit can impact your score is with your length of credit history.
Length of credit history looks at the age of all your credit accounts. How old is your oldest account? How young is your newest account? And most importantly, what is the average age of all of these accounts put together?
So, each time you open a new credit line, you are potentially damaging the length of credit history portion of your score. And the only fix for this is to be patient and wait for your new accounts to age.
Increase in Credit Utilization
How much debt do you currently have? The answer is the first part of what makes up the amounts owed portion of your score.
Now, how many dollars worth of available credit, or total credit limits, do you have? This number is the second part of the amounts owed portion of your score.
The credit builder loan offered by Self reports as an installment loan. So the total value of the loan you took out is used as a sort of credit limit while the amount you still owe on the personal loan is reported as your usage.
The higher the balance on your loan, the worse it is for your credit score. But, each month you make payments, your outstanding balance will go down and your score will begin to increase.
Utilization on credit cards, or revolving accounts, is calculated a little differently. Here, the credit card balance for all of your cards is combined and compared to the sum of all the credit limits on each of your credit cards. This results in your credit utilization rate.
The higher your credit card debt, the higher your utilization rate will be, and the lower your score. This is something to keep in mind with the Self Visa secured credit card. To make the best use of the card for improving your credit, you’ll want to keep the reporting balance low.
You Paid off the Loan and It Becomes a Closed Account)
When you pay off the loan, it can feel like a grand achievement. Until you do a credit check and find your score has dropped. Wait, what?
Paying off your credit builder loan is good in that it shows a bank that you can manage your debt well, but it can temporarily decrease your score, particularly if it is the only installment loan you have on your credit profile.
This is related to the credit mix portion of your credit score. Having just one type of credit, i.e. revolving debt is considered a bad credit mix while having a healthy credit mix of revolving debt and installment loans is good for your credit score.
Your score can also get dinged if the now-closed loan was the only account you had with a low balance. If all of your remaining accounts have a high credit utilization rate or high balance, the amounts owed portion of your credit will take a hit.
It is important to note that closing the credit builder account does not remove it from your credit report or end its impact on your credit rating. The payment history you established with the loan (good or bad) will remain on your credit report well after the account is closed.
You Missed a Payment
A missed payment is the single worst thing that you can do for your score. The biggest factor in your credit score is your payment history.
If you are only a day or two late, you may be able to salvage the situation before it impacts your credit score. But once you are 30 days late, it gets reported to the credit bureaus as a late payment. And even one late payment like this can ding your credit score significantly.
Just how many points you will lose depends on how many other open accounts you have and what the payment history looks like on those.
Ignoring the problem won’t make it go away either, as there are bigger dips to your score when the payment becomes 60 days or 90 days late.
When you open a credit builder loan, you are committing to improving your score.
If your circumstances change and your ability to pay on the account is diminished, it would be better for your score if you contacted Self about closing the account instead of letting it become delinquent.
Things Not Related to Self
Since your score is made up of many factors, it may not actually be the opening of a credit builder account that lowered your score.
All of the other credit lines you open or apply for will have just as big of an impact.
Let’s say the reason you opened a credit builder account was that you kept getting denied for credit cards because of your credit score. But after opening the credit builder loan, your score continues to decrease.
This is likely because all the hard pulls for those credit card applications you submitted are finally reporting. Credit reporting is not perfect, and sometimes it can take a month or two for all the changes to your credit profile to correctly report.
Other reasons your credit score might drop include: charging more to your credit cards, opening new lines of credit, closing existing lines of credit, making late payments on your other accounts, or credit reporting errors.
So before you blame Self and their credit builder loan for hurting your credit score, double-check your report to see if there are any other recent changes.
Does Self Drop Your Credit Score?
Generally speaking, no, a credit builder loan or secured credit card account from Self will not drop your credit score.
Self’s credit builder accounts are designed to help you with building credit. Their no minimum score requirement and no hard inquiry approach help decrease the impact that opening a new credit line usually has on your credit score.
And the fact that they report to all three bureaus means that as you make on-time monthly payments on your account, your credit score will begin rising.
Nearly all the reasons that your credit score may decrease after opening a credit builder account are temporary situations that will resolve on their own with time.
If you are concerned about score drops, or worried that Self’s credit building loan program isn’t the best fit for you, there are alternatives out there.
If you just need a small but quick credit boost, for say, refinancing an auto loan to get a better interest rate, then maybe Experian’s Credit Boost program is the right one for you.
If you are looking to show that you can take on higher debt amounts (Self’s limit is $1800) or you want to establish a repayment history or loan term that lasts longer than 2 years, maybe one of Credit Strong’s credit builder plans would be a better choice.
Any change to your credit report, even a small one, has the power to alter your score for good or bad. Credit scores are not static, they fluctuate from month to month, or even, week to week. So don’t let a small decrease dash your dreams of achieving a good credit score.
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Amanda Garland is a personal finance blogger living in Dallas, TX. 10 years ago she was living paycheck to paycheck and knew nothing about how credit works. She learned some hard lessons in her fight for financial stability. Now she has a friendly competition going with her husband to see who can reach a credit score of 850 first. She is also a poet, having obtained a Bachelor of Fine Arts degree in Creative Writing.