The Consumer Financial Protection Bureau today released a study of the effects of so-called credit-builder loans on credit scores. These loans are designed to allow individuals with no credit files or poor credit histories to build or repair credit. “Overall, the results suggest that the CBL worked as intended for people without existing debt, but not for consumers who already had debt,” the bureau found, adding that “CBL delinquency rates serve as a reminder that CBLs may harm some consumers’ credit.”
According to the bureau’s study, which examined more than 1,500 CBL borrowers at a Midwestern credit union, CBLs were most likely to have positive outcomes for borrowers with no existing debt or credit score. Opening a CBL increased the likelihood of having a score by 24% for those with no existing loans, and borrowers without existing debt saw their credit scores rise by 60 points more than those carrying current debt.
Indeed, borrowers with existing debt may have had difficulty making payments on their CBLs and their current debts. The CBL was associated with a higher late-payment rate on non-CBL loans, and nearly four in 10 CBL borrowers made at least one late payment on their CBL. Borrowers with existing debt saw their average credit scores dip by about three points.
With a typical CBL, borrowers make payments over a period of six to 24 months before receiving loan funds. The lender then reports the payments to credit bureaus and deposits the principal payments into the borrower’s savings account. In the CFPB study, CBL principal amounted to $600, with 12 monthly payments of $50 plus interest.