New report outlines options for consumers to establish and improve credit-even with existing debt, in some cases.
7/15/2020 11:00
The Consumer Financial Protection Bureau has released research on the benefits of “credit builder loans” in helping consumers establish a credit record and improve their credit scores if they have 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, 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), according to a news release from the CFPB.
Among the highlights, according to the news release:
- For participants without an existing loan, opening a CBL increased their likelihood of having a credit score by 24 percent. 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 Another 19 million Americans have a credit record but no score because their history is too thin or out-of-date.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 CFPB reports.
“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.”
The study also shows a 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, according to the CFPB. 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 % 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.
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