On July 13, 2020, the Consumer Financial Protection Bureau (“CFPB”) issued a study, entitled “Targeting Credit Builder Loans: Insights from a Credit Builder Loan Evaluation” and an accompanying practitioner’s guide – ultimately concluding that a credit builder loan (“CBL”) 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. According to the CFPB, consumers without a credit score may face challenges to accessing credit or qualifying for lower-interest rate loans and credit products. Approximately 26 million U.S. adults (one in ten) lack a credit record and are “credit invisible.” Another 19 million have a credit record but no score because their history is too thin or out-of-date.
The terms of CBLs vary across financial institutions, but the central feature is the requirement that the borrower makes payments before receiving funds – opposite of more traditional loans. As part of the opening of a CBL, the lender moves its own funds into a locked escrow account. The borrower makes payments, including interest and fees, in installments typically over a period of 6 to 24 months, which appear on the borrower’s credit report.
The CFPB report examined 1,531 credit union members offered CBLs. Key takeaways include:
- Participants without an existing loan experienced a 24% increase in likelihood of having a credit score if he or she opened a CBL.
- 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.
- Nevertheless, 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. This may suggest, according to the CFPB, that these consumers had difficulty incorporating CBL payments into existing payment obligations.