Credit Builder Loans (CBLs) are accounts on credit reports that directly translate into credit scores. They impact payment history, credit mix, and account age. Used responsibly, CBLs thicken credit reports with positive marks and thereby improve score. Missed payments, however, establish negative marks and reduce score.

Time is a definitory factor. CBLs' ability to improve credit applies best over durations ≥12 months, before which the addition of a new account decreases account age and therefore credit profile.

CBLs report as normal personal loans to the credit bureaus (Experian, Equifax, and TransUnion). Despite their use of flexible eligibility criteria, deferred disbursement, and savings-based collateral, CBLs do not signal an intention to improve credit.

Their impact is most effective on thin credit files. Credit reports with large derogatory marks such as collections require principal amounts ≥ the negative marks.

Most secured CBLs (payment-secured and fully-secured) have neutral cancellation terms, which allow borrowers to cancel (not pay-off) without penalty, and report with the positive mention "Closed—paid as agreed."

Summary

How much will it raise your score?

Consumers with limited credit history can expect an increase of 50 - 100 points within 6 to 12 months of opening a CBLs.

For example, Moneylion users have seen 40+ point jumps in just 2 months and Cambio customers saw an average of 50+ over 12 months.

These figures are based on studies by the National Bureau of Economic Research (NBER)¹ and the Consumer Financial Protection Bureau (CFPB)², our survey of over 80 CBLs in the market³, and personal anecdotes.

Credit Report ≠ Credit Score

Credit scores are numeric re-representations of information found on credit reports. CBLs impact scores because they add details to reports. As reports grow with number of accounts like CBLs, they become more reliable (aka thicker). Because scores re-represent, they improve with CBLs.

Payment History

Credit builder loans establish payment history. Every on-time payment is a positive mark on a credit report. A CBL account with a large number of positive marks demonstrates reliability and consistency that is reflected in report and accompanying score.

There are several credit scoring models, but the most popular is FICO 8. Payment history is the most important factor, weighing 35% of the total.

Credit Mix

Credit builder loans add installment accounts to credit mix. A healthy mix of installment (i.e. loan) and revolving (i.e. credit card) accounts demonstrates a mature understanding of debt that is reflected in report and adjacent score.

Credit mix represents 10% of the FICO 8 scoring model.

Account Age

Credit builder loans anchor an account in time whose growth increases average account age. As a matter of credit principle, older accounts signal responsibility. Credit builder loans age to 10 years before falling off a credit report, and they have the greatest impact after 12 months.

Account age, also know as length of credit history, represents 15% of the FICO 8 scoring model.

The aging-off of accounts is a reason why consumers need a strong credit building plan to maintain good credit over a lifetime.

Impact over Time

To summarize, the weight of accumulated payments and age of account grows in importance over time, whereas the impact of credit mix is instantaneous.

From the first payment made, CBLs have a strong positive influence on payment history, which is the most important factor.

They have a strong positive impact on credit mix immediately and in the near future.

Finally, they have a slight negative impact on amounts owed, followed by a neutral impact in the near future, and finally a strong positive effect long-term. This is why consumers sometime see score drops when they take out a credit builder loan.

Reporting as Normal Loans

CBLs report just like normal loans to credit bureaus despite their use of deferred disbursement, savings-based collateral, and flexible eligibility criteria.

They include the same information as traditional loans, including total loan amount, current balance, payment history, late payments, and closure status. In other words, CBLs are incognito in the eyes of credit reporting institutions and lenders.

Experian, Equifax, and TransUnion

Credit builder loans may impact credit reports differently. Lenders are free to choose to which bureau(s) they report, and credit builder loans are not an exception.

For example, a CBL reported to Experian may not report to Equifax and TransUnion. This is a reality of credit that consumers must consider when deciding on a CBL. Good planners filter out lenders with incomplete reporting standards.

Amount & Derogatory Marks

Borrowers must select an appropriate loan amount for their credit report. A guiding principle is to accept amounts equal to or greater than the amount of derogatory accounts, if any. For example, a consumer with $1,000 in collections should look for CBLs ≥$1,000.

This is not a hard rule, but the concept is intuitive. Imagine three friends. The first borrows $100 from from friend two and does not repay. Friend one then borrows $5 from friend three, which she promptly pays back. The though provoking question is, should friend two lend $100 again to friend one?

Most respondents say no because $5 in positive history is not comparable to $100 in negative history. Lenders think the same way.

No-Penalty Early Payoff

Most credit builder loans allow the borrower to pay off credit builder loans with no financial or credit penalty.

This flexibility is useful for profiles who are uncertain about CBLs. They can accept a multi-year CBL and pay it off for peace of mind that comes with being debt-free (though we don't recommend it).

No-Penalty Cancellation

Many secured credit builder loans offer no-penalty cancellation. This means a borrower can end the agreement, receive his/her paid-in cash, and see the loan reported as "Closed—paid as agreed."

There is no requirement to pay off the full loan amount because the borrower does not hold cash. It is held in a secured savings account (see payment-secured CBLs for more information).

Cancellation is usually not recommended because the purpose of credit builder loans is to improve credit in large part by creating payment history that cancellation eliminates.

However, the ability to close at will provides peace of mind to those with limited liquidity who may need to make quick financial decisions.

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