CFPB Study Finds Credit Builder Loans Can Help Consumers Build Credit

The Consumer Financial Protection Bureau (CFPB) recently issued a report entitled “Targeting Credit Builder Loans: Insights from a Credit Builder Loan Evaluation,” which found that credit builder loans (CBLs) could help establish credit records and boost credit scores for consumers without outstanding debt.

“Without a credit score, consumers may face obstacles to accessing credit or qualifying for lower interest rates,” the report reads. “CBLs are one such product uniquely designed for consumers without a score and those with lower scores seeking opportunities to demonstrate a positive repayment history.”

CFPB research has found that about 26 million U.S. adults lack a credit record, and 19 million with a record have no score because their credit history is outdated or too thin.

In contrast to most traditional loans, CBLs require the borrower to make payments before receiving funds. The lender moves its own funds into a locked escrow account, and the borrower usually makes payments over a period of 6 to 24 months. At the end of the loan period, the funds are disbursed.

The Bureau’s study has found that opening a CBL increased consumers’ likelihood of having a credit score by 24 percent. Scores for participants that had no existing debt increased by 60 points more than those of participants with existing debt, who often saw a decrease in scores.

Roughly 82 percent of participants entered the study with an average score of 560, while the national average score was just below 700. Additionally, 62 percent of participants had an annual income of under $30,000, 90 percent were African American, and about a quarter of participants had a college degree.