Financial Product Could Help Consumers Build Credit
The Consumer Financial Protection Bureau (Bureau) today released a report indicating that a credit builder loan could increase the likelihood of establishing a credit record for consumers without one, and could help improve the credit scores of those with no current outstanding debt. The Bureau issued “Targeting Credit Builder Loans: Insights from a Credit Builder Loan Evaluation” and an accompanying practitioner’s guide to broaden insight for community-based organizations and financial institutions working toward expanding financial inclusion.
The report, being released during Consumer Financial Protection Week, July 13-17, examines 1,531 credit union members who were offered a financial institution’s credit builder loan (CBL). Among the highlights:
- For participants without an existing loan, opening a CBL increased their likelihood of having a credit score by 24%. Almost all participants with existing debt already had a credit score, so the CBL had minimal effect on their likelihood of having score.
- Participants without existing debt saw their credit scores increase by 60 points more than participants with existing debt.
- The CBL was associated with an average increase in participants’ savings balances of $253.
Bureau research has found that approximately 26 million U.S. adults, one in 10, lack a credit record and are “credit invisible.” Another 19 million Americans have a credit record but no score because their history is too thin or out-of-date. Without a credit score consumers may face challenges to accessing credit or qualifying for lower-interest rate loans and credit products.
The terms of credit builder loans (CBL) vary across financial institutions, but the central feature is the requirement that the borrower makes payments before receiving funds – opposite of more traditional loans. When a borrower opens a CBL, the lender moves its own funds, generally $300 to $1,000 into a locked escrow account. The borrower makes payments, including interest and fees, in installments typically over a period of 6 to 24 months. These payments appear on the borrower’s credit report.
Other findings of the study, of which enrollment took place from September 2014 through February 2015, indicate that the CBL appeared to cause a decrease in scores for participants with existing debt; and on average, those with existing loans saw their scores decrease slightly, suggesting that these consumers had difficulty incorporating CBL payments into existing payment obligations. The report suggests that financial counseling could be provided, either before a consumer opens a CBL or while they are making CBL repayments.
About 82 percent of participants entered the study with a credit score. Among participants who entered the study with a score, the average score was a subprime 560; nationally, the average score was just under 700 at the time of the study. Sixty-two percent of participants had annual household income under $30,000. The majority of participants were female, nearly 90 percent were African American, the average age was 43, and about one in four had a college degree.
The credit builder loan study can be found here: https://files.consumerfinance.gov/f/documents/cfpb_targeting-credit-builder-loans_report_2020-07.pdf
The practitioner’s report can be found here: https://files.consumerfinance.gov/f/documents/cfpb_targeting-credit-builder-loans_practitioner_guide_2020-07.pdf
Research on credit builder loans, can be found here: https://www.consumerfinance.gov/data-research/research-reports/targeting-credit-builder-loans/
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by regularly identifying and addressing outdated, unnecessary, or unduly burdensome regulations, by making rules more effective, by consistently enforcing federal consumer financial law, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.