Study Found Mixed Results for Credit-Builder Loans at CU

A recently released report by the Consumer Financial Protection Bureau (CFPB) found mixed outcomes for participants enrolling in credit-builder loan (CBL) program at a credit union.

CBLs are designed to allow individuals with no credit files or poor credit histories to build or repair their credit.

The CFPB’s study examined 1,531 CBL borrowers at a Midwestern credit union. Enrollment took place from September 2014 through February 2015.

About 82 percent of participants that entered the study had a credit score. Among participants who entered the study with a credit score, the average credit score was a subprime 560. Seventy percent of participants had an existing loan when entering the study, and 32 percent had a non-CBL loan from the credit union. Forty-five percent had been delinquent on one or more loans in the past twelve months. 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.

According to the study, when a borrower opened the CBL, the credit union moved $600 of its own dollars into a locked savings account. Borrowers were then required to make 12 monthly payments of $50 plus interest. After each payment, the lender released $50 to the borrower’s regular savings account. The credit union reported the borrowers’ payment histories to the three major credit reporting agencies: Equifax, Experian, and
TransUnion.

According to the study, CBLs were most likely to have positive outcomes for borrowers with no existing debt or credit score. For participants without an existing loan, opening a CBL increased their likelihood of having a credit score by 24 percent. Participants without existing debt saw their credit scores increase by 60 points higher than participants with existing debt. Forty-five of the participants entering the study without existing debt made at least one late payment on CBL.

However, the study found that CBLs appeared to cause a slight decrease in credit scores for participants with existing debt.

The CFPB concluded that 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.

The CBL was associated with an average increase in participants’ savings balances of $253. This increase was entirely driven by borrowers with existing debt.

“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 National Credit Union Administration, 1,509 federally insured credit unions offer credit builder loans, as of March 2020.

Read the study.