In an effort to help financial institutions work toward expanding financial inclusion in communities, the CFPB on Monday released a report along with guidance to help broaden insight for community-based organizations and financial institutions.
The report, “Targeting Credit Builder Loans: Insights from a Credit Builder Loan Evaluation,” indicates that credit builder loans could increase the likelihood of establishing credit records for consumers without them, and could help improve the credit scores of those with no current outstanding debt, according to a Monday CFPB press release.
Credit builder loans are designed for consumers looking to establish a credit score or improve an existing one, while at the same time giving them a chance to build their savings.
CFPB research indicates that approximately 26 million U.S. adults — one in 10 — lack credit records and are “credit invisible.” Another 19 million Americans have credit records, but no score because their history is too thin or out of date, according to the CFPB. “Without a credit score consumers may face challenges to accessing credit or qualifying for lower-interest rate loans and credit products,” the press release stated.
The report, which, examined more than 1,500 credit union members who were offered a financial institution’s credit builder loan, indicates that:
- for participants without an existing loan, opening a credit builder loan increased their likelihood of having a credit score by 24 percent;
- almost all participants with existing debt already had a credit score, so the credit builder loan had minimal effect on their likelihood of having a score;
- participants without existing debt saw their credit scores increase by 60 points more than participants with existing debt; and
- the credit builder loan was associated with an average increase in participants’ savings balances of $253.
Guidance on credit builder loans can be accessed by clicking here.