Full Disclosure: I don’t recommend taking out an installment loan unless you understand the costs and how the process works. I did my best to explain the process, but I apologize if it is still confusing.
Good afternoon everyone, I hope your week is going well. 12 months ago, I started a journey to increase my credit score by opening an installment loan called a Credit Builder Account with Self (Self was previously named Self Lender). Before I started this experiment, the Account Mix portion of my credit score was very 1 sided. I had 30+ credit cards, but no auto loans, home loans, student loans, or installment loans. As of September 2020, my Credit Sesame account shows that I now have 2 types of accounts (30+ credit cards and 1 installment loan). This information can be found at the 3 credit bureaus and on Credit Karma, but the screen on Credit Sesame was the prettiest and easy to understand.
As a reminder, the Account Mix portion of your credit score only makes up 10% of your overall credit score, so it is not as important as your Payment History (35%) and your Credit Usage (30%). In this post, I will show you how the Credit Builder Account works and how much it costs to take out the installment loan.
One of the great features of the Credit Builder Account is that is reports your installment loan to all 3 credit bureaus. Here is the summary page of my recent Equifax credit report. My Equifax credit report shows that I have 34 revolving (aka credit card) accounts and 1 installment loan (the Credit Builder Account). I finished paying back the loan a week ago, so my credit report won’t show that the loan is completely paid off until early next month when the loan payment is reported to all 3 credit bureaus.
Here are some more details on the Credit Builder Account. The loan was administered / created by Self but held at Sunrise Bank.
When I sign into my Credit Builder Account, the home screen shows that my credit score went up 25 points, based on my Experian VantageScore 3.0 score. I don’t want to give all the credit to the Credit Builder Account for the score increase. Some of the score increase was due to not applying for any new credit cards in the last 12+ months and keeping my credit card balances low (thanks to spending more time at home during the Coronavirus Pandemic).
Here are more details about the Credit Builder Account. I opened the installment loan on September 9, 2019, and finished paying it off on September 9, 2020. This next part is kind of tricky to explain, but instead of taking a traditional lump sum loan up front and then paying it back over time, the opposite happened. You pay the loan back and the funds go into a CD (certificate of deposit) that earned 0.10% interest. After you pay back the entire loan, the CD is unlocked and directly deposited back into your checking / savings account.
Here is the complete payment history of the installment loan / CD funding. I paid a $9 administrative fee for Self to set up my loan / CD and then I paid $48 each month for the next 12 months. After 12 months, I paid a total of $585 to Self. When the installment loan / CD funding was completed, I received $545 back. I “lost” $40 in cash plus whatever interest I could have earned if I put the money in a traditional savings account, but that is where the 10.34% loan interest rate comes in.
Long story short, I paid $585 over the course of 12 months in order to get a $545 payment and an installment loan added to my credit report.
If you already have credit cards, a home mortgage, a car loan, and a student loan, the Credit Mix portion of your credit report is probably as good as it’s going to get. However, if you only have credit card accounts and no other type of accounts, you might consider following in my footsteps with this Credit Builder Account. To get started, click here to create a Self account (this is my referral link and I will receive $10 after you create a Self account and make your first loan payment).
Self offers 4 different “monthly commitment” dollar amounts ranging from $25-$150. As long as the installment loan is successfully completed and paid off in full, I don’t think it matters what the monthly payment amount is or the duration of the loan. With that in mind, I decided to pick the “cheapest” loan, based on the total dollar amount I would lose at the end of the loan. Due to changing interest rates, the loans listed below have slightly different numbers than the Credit Builder Account I opened in 2019. All the loans have a $5 administrative fee, so I am not including that in the numbers below. Here is a breakdown of the first 2 loans with the lower monthly commitment amounts:
- With the $25 monthly commitment, you pay $25 for 24 months and receive a $520 payment 2 years later. $25 x 24 months = $600 total paid – $520 payment = $80 cost of the loan
- With the $35 monthly commitment, you pay $35 for 24 months and receive a $724 payment 2 years later. $35 x 24 months = $840 total paid – $724 payment = $116 cost of the loan
Here is a breakdown of the last 2 loans with the higher monthly commitment amounts:
- With the $48 monthly commitment, you pay $48 for 12 months and receive a $539 payment 1 year later. $48 x 12 months = $576 total paid – $539 payment = $37 cost of the loan
- With the $150 monthly commitment, you pay $150 for 12 months and receive a $1,663 payment 1 year later. $150 x 12 months = $1,800 total paid – $1,663 payment = $137 cost of the loan
As you can see, the $48 monthly commitment loan is still the cheapest option since you will only lose $37 after making all the monthly payments and receiving the payment back at the end of 12 months. As I mentioned at the beginning of the post, I don’t recommend taking out an installment loan unless you understand how the loan works and what the cost will be. If you have any questions about the process, please leave a comment below. Have a great day everyone!