Bureau: ‘credit builder loans’ increase likelihood of establishing credit record, improving credit scores

Credit builder loans could increase the likelihood of credit record establishment for consumers without such documentation and could improve credit scores of those without current outstanding debt, according to a report released Monday by the federal consumer financial protection agency.

In a release, the Consumer Financial Protection Bureau (CFPB) said the report focuses on 1,531 credit union members who were offered a credit builder loan (CBL). The report indicates, the bureau said, that opening a CBL increased a consumer’s likelihood of having a credit score by 24%; participants without existing debt saw their credit scores rise by 60 points more than participants with existing debt; and the loan was associated with n average increase in participants’ savings balances of $253.

A number of credit unions offered the loans. Typically, under the terms of the CBLs, 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 bureau said. “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.”

About two years ago, the agency released a study that found consumers in rural areas and “micropolitan statistical areas” – non-rural census tract areas outside of metropolitan statistical areas (MSAs) – have the highest incidence of being “credit invisible.” Approximately 15% of consumers more than age 25 in rural areas can be classified as “credit invisible,” and approximately 12% in micropolitan areas, the study found.

“Credit-invisibles” are consumers whose documented credit history is so limited they don’t have credit scores or whose credit scores are not based on a complete history of their debt repayment. According to earlier bureau research, approximately 26 million U.S. adults, one in 10, lack a credit record and are “credit invisible.”

“Without a credit score consumers may face challenges to accessing credit or qualifying for lower-interest rate loans and credit products,” the bureau said in a release Monday.

The report was issued, the agency said, in conjunction with Consumer Financial Protection Week, being celebrated all this week.

CFPB Study Shows Financial Product Could Help Consumers Build Credit