Last week, the Consumer Financial Protection Bureau issued a report indicating that a credit builder loan could increase the probability of developing a credit history for those without one. The study also found that the financial product can help boost the credit profiles for those with no current outstanding debt.
What is a Credit Builder Loan?
Credit-builder loans are designed for those who have thin or poor credit. A lender holds the amount borrowed in a bank account while the borrower makes payments. When the loan is paid off, the borrower receives the money. Think of it as a trial run for credit responsibility.
The report, issued during Consumer Financial Protection Week (July 13th-17th), studied 1,531 individuals who were offered credit builder loans by their financial institutions. The study found that a credit builder loan can increase the likelihood of having a credit score by 24%. It also found that the loan could increase the scores of those without existing debt by 60 points more than those with existing debt. Having the CBL was associated with a savings balance increase of $253.
The CFPB has found that over 25 million Americans are “credit invisible”, meaning they have no credit record at all. An additional 19 million Americans have a credit record, but no score due to having a thin or outdated history. These circumstances can have a negative impact on the consumer, particularly when it comes time to apply for a new loan.
Interestingly, the study found the CBL actually caused a decrease in scores of those who had existing debt, and on average, those with existing loans saw their scores decrease slightly. This might suggest these borrowers had difficulty making CBL payments alongside their existing loan payments.
Of the 1,531 total participants, about 82 percent of them had a credit score at the time of the study. The average score among participants was a subprime 560.