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CFPB study on credit builder loans
The CFPB yesterday released a report indicating that a credit builder loan could increase the likelihood of establishing a credit record for consumers without one, and could help improve the credit scores of those with no current outstanding debt. The Bureau issued “Targeting Credit Builder Loans: Insights from a Credit Builder Loan Evaluation” report and an accompanying practitioner’s guide to broaden insight for community-based organizations and financial institutions working toward expanding financial inclusion.
In a typical credit builder loan agreement, the lender advances the loan funds to a locked savings account. The consumer then makes payments to the lender over 6 to 24 months. Funds are advanced from the locked account to the consumer's savings account either as payments are made or when the program has been completed. The lender reports the consumer's payment record to a credit reporting agency.
Among the report's findings:
- 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.