Association for Public Policy Analysis & Management

Credit building loan products are advertised as a means to help individuals build or repair their credit and have recently grown in popularity and availability.  However, there is little evidence about whether these products are effective, and if so, for whom. In partnership with St. Louis Community Credit Union (SLCCU), we conducted a randomized controlled field trial of a credit builder loan product to examine its impact on credit, savings, and financial stability among the economically vulnerable. 

Between October 2014 and February 2015, research staff located in 7 of SLCCU’s branches enrolled participants into the study.  Participants completed a short survey eliciting demographic characteristics and financial status and attitudes.  Upon completion of the survey, enumerators described a credit building loan product offered by SLCCU and elicited respondent interest. 

The product described to participants was a secured credit building loan, collateralized by the credit union.  For individuals who open the loan, the credit union places $600 in a restricted access savings account.  Borrowers then make monthly payments of approximately $54 (depending on the interest rate at product opening) and the credit union subsequently releases $50 from the restricted savings account back to the consumer.  Borrowers are nudged not to withdraw the released savings during loan repayment to help build savings while building credit.  The loan duration is 12 months and successful monthly payments are reported to all 3 major credit bureaus in an effort to boost members’ credit scores.

Our randomization occurred after respondents indicated interest in the credit building loan product.  In particular, individuals who said either that they were interested or might be interested in opening the product were randomized into one of two conditions with equal probability: an “instant access” condition (encouraged group) where clients were given immediate access to the product, and an “access after financial education” condition (discouraged group) in which clients were required to complete financial education prior to opening the product. 

We find positive selection into the loan product, those who expressed interest were more likely to have limited or negative credit histories, scores, and overall financial health.  Further, individuals who opened the loan experienced large increases in FICO score, VantageScore, and probability of being credit scoreable.

Of those interested in opening the loan, approximately half were randomized into the encouraged and discouraged groups respectively.  We find that a modest financial education requirement had a large deterrent effect on product take-up suggesting required financial education can be a large barrier to product access even among a well target sample interested in improving their financial health. 

While those who opened the loan experienced improved credit health outcomes, preliminary analysis suggests this was driven in part by selection.  We find little effect in ITT and TOT analyses, though preliminary subgroup analysis suggests credit scores increased for those with limited credit histories.  Impacts on savings will be available by the conference.