This Is What ConsumerFinance.org Says About Credit Builder Loans

With countless lenders and banks always trying to sell you something, it can be tough to figure out which credit products may be helpful and which ones may cause financial harm.

That’s why many people visit ConsumerFinance.gov for financial guidance. ConsumerFinance.gov is the website of the Consumer Financial Protection Bureau (CFPB), a government agency created to protect regular people in the financial marketplace.

If you want to boost your credit and you’re thinking about getting a credit builder loan to do so, you might wonder what ConsumerFinance.gov has to say about them. 

Ask ConsumerFinance.gov: Credit builder loan basics

According to ConsumerFinance.gov, credit builder loans can be beneficial for people looking to improve their credit scores or establish a score. However, they come with risks, especially if you have existing debt.

In 2020, the CFPB evaluated a credit builder loan and published an in-depth report of its findings. Here’s how it summarized the report:

“Overall, the CBL [credit builder loan] proved more effective for participants who entered the study without existing debt, both in terms of helping people establish a credit score and in improving their scores. Taking out a CBL appeared to reduce borrowers’ abilities to keep up on other existing loan payments, even though CBL payments were released immediately back to them. The CBL appears to have helped some participants build savings, but these results were less conclusive than others.”

In other words, credit builder loans might help you boost your credit score and could help you build savings. However, they might make it harder to keep up with other debt obligations, and that can cause major credit damage.

How do credit builder loans work?

What is a credit builder loan? CFPB defines them this way:

“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.”

Sometimes, the loan principal earns interest during the repayment term. If it does, the lender might pass that interest on to you. However, it may not be enough to offset interest and fees.

Credit builder loans aren’t for everyone, but if you’re having trouble securing more traditional kinds of credit, they might help you establish or improve your credit history. Before you make your decision, you should consider these financial risks:

• Interest and fees may reduce your final loan payout
• When you take out the loan, you can’t access the funds right away
• If you miss other payments to cover your loan payment, you could damage your credit score
• If you miss one or more payments, you could cause additional damage to your score

If you’ve been wondering, “What is a credit builder loan?” CFPB guidance might make you hesitate before taking one out. Fortunately, there’s a simpler, lower-risk alternative, and that is credit accounts.

What the CFPB doesn't cover: Credit accounts

For many people, credit accounts make building credit easier. Credit cards are probably the best-known kind of credit account, but if you don’t qualify, it’s worth applying for a line of credit with an online lender.

Kikoff’s credit line is meant for people with poor credit or a thin credit file. Here’s how it works:

• You apply, and there is no credit check
• You gain access to a credit line you can use to buy items in its store
• You pay off the purchases over time
• There’s no interest
• Your payments are reported to credit bureaus to help you build credit

You can also access a range of other credit-building tools, including secured credit cards!

Ready to boost your credit?

Improving your credit score takes time and effort, but it’s worth it. And when you join Kikoff, you’ll have support and guidance every step of the way.

Kikoff is free to join, and there’s no credit check. If you want to open a credit account with us or just see all the tools we have to offer, create your account today!