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.