How to Rebuild Your Credit

CREDIT BUILDER LOAN COULD HELP CONSUMERS BUILD OR REBUILD THEIR CREDIT

(reprint from CFPB) July 13, 2020, the Consumer Financial Protection Bureau (Bureau) 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” and an accompanying practitioner’s guide to broaden insight for community-based organizations and financial institutions working toward expanding financial inclusion.

The report, being released during Consumer Financial Protection Week, July 13-17, examines 1,531 credit union members who were offered a financial institution’s credit builder loan (CBL).  Highlights:

• For participants without an existing loan, opening a CBL increased their likelihood of having a credit score by 24%. 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.

Bureau research has found that approximately 26 million U.S. adults, one in 10, lack a credit record and are “credit invisible.”  Another 19 million Americans have a credit record but no score because their history is too thin or out-of-date.  Without a credit score consumers may face challenges to accessing credit or qualifying for lower-interest rate loans and credit products.

The terms of credit builder loans (CBL) vary across financial institutions, but the central feature is the requirement that the borrower makes payments before receiving funds – opposite of more traditional loans.  When a borrower opens a CBL, the lender moves its own funds, generally $300 to $1,000 into a locked escrow account. The borrower makes payments, including interest and fees, in installments typically over a period of 6 to 24 months.  These payments appear on the borrower’s credit report.

Other findings of the study, of which enrollment took place from September 2014 through February 2015, indicate that the CBL appeared to cause a decrease in scores for participants with existing debt; and on average, those with existing loans saw their scores decrease slightly, suggesting that these consumers had difficulty incorporating CBL payments into existing payment obligations.  The report suggests that financial counseling could be provided, either before a consumer opens a CBL or while they are making CBL repayments.

About 82 percent of participants entered the study with a credit score.  Among participants who entered the study with a score, the average score was a subprime 560; nationally, the average score was just under 700 at the time of the study.  Sixty-two percent of participants had annual household income under $30,000.  The majority of participants were female, nearly 90 percent were African American, the average age was 43, and about one in four had a college degree.

The credit builder loan study can be found here: https://files.consumerfinance.gov/f/documents/cfpb_targeting-credit-builder-loans_report_2020-07.pdf

The practitioner’s report can be found here: https://files.consumerfinance.gov/f/documents/cfpb_targeting-credit-builder-loans_practitioner_guide_2020-07.pdf

Research on credit builder loans, can be found here: https://www.consumerfinance.gov/data-research/research-reports/targeting-credit-builder-loans/

MUSINGS FROM DIANE:

Most folks in the United States believe their lives are controlled by their credit report.  For the most part, they are correct.  The ability to buy a home, a vehicle, lease an apartment or pay lower insurance is dictated by their credit report.  The proper use of credit was never taught in school, which meant it was up to our family to teach us.  I never heard the word credit from my parents, how about you?  Instead, we learned from life, each making our own decisions – some good and some bad.