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CFPB Study: A CBL Loan Can Help Buyers Build Credit

The nation’s consumer bureau says credit-building loans (CBL) can help boost credit scores for people who don’t carry debt or don’t have any credit score at all. Consumers with a CBL make regular monthly payments, but they don’t collect “loan” money until it’s paid off.

WASHINGTON, DC – The federal Consumer Financial Protection Bureau (CFPB) released a report that suggests a credit builder loan (CBL) can increase the likelihood of establishing a credit record if a consumer doesn’t have one. It can also help improve the credit score of people who have a thin score with no current outstanding debt.

CFPB says it issued “Targeting Credit Builder Loans: Insights from a Credit Builder Loan Evaluation” and an accompanying practitioner’s guide to help community-based organizations and financial institutions.

CBLs exist only to help people boost their credit scores. A consumer who takes out a CBL agrees to make regular monthly payments – a key requirement for boosting credit scores – but they usually don’t receive money until the “loan” is paid off.

In a typical CBL, the lender moves funds into a locked savings account. The borrower then makes installment payments for six to 24 months, and the lender reports those payments to the credit reporting agencies. Once the payment period ends, the lender deposits the principal payments into the borrower’s savings account, though in a few programs they CBL borrower may get it monthly.

The CFPB report examined 1,531 credit union members who were offered a financial institution’s credit builder loan (CBL). Among the highlights:

  • For participants without an existing loan, a CBL increased their likelihood of having a credit score by 24%. Most participants with existing debt already had a credit score.
  • Participants without existing debt saw their credit scores increase 60 points more than participants with existing debt.
  • The CBL was associated with an average increase in participants’ savings balances of $253.

A CBL didn’t help consumers already carrying debt, however. In fact, it slightly lowered their credit scores. CFPB thinks that the people already in debt may have “had difficulty incorporating CBL payments into existing payment obligations.” It suggests that people currently in debt seek financial counseling before considering a CBL loan.

CFPB says about 26 million U.S. adults – one in 10 – lacks a credit record and are considered “credit invisible.” Another 19 million have a credit record but no score because their history is too thin or out-of-date.

Without a credit score, consumers have trouble getting credit or, if they can secure a loan, qualifying for lower interest rates.

More information about CBLs is posted on CFPB’s website.

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