Credit Building or Credit Crumbling? A Credit Builder Loan’s Effects on Consumer Behavior and Market Efficiency in the United States
Jeremy Burke, Julian Jamison, Dean Karlan, Kata Mihaly, and Jonathan Zinman
Review of Financial Studies 36: 1585-1620, 2023.
The paper explores the growing use of Credit Builder Loans (CBLs) in the U.S.—structured installment loans meant primarily to help consumers establish or improve credit histories by reporting repayments to credit bureaus. While CBLs are designed to build credit, limited empirical research exists regarding their actual effects. The authors ask: do these products successfully improve credit outcomes and market efficiency, or do they unintentionally lead to negative behaviors or outcomes? They further investigate whether CBLs introduce distortions or externalities for consumers and lenders.
The study employs a randomized encouragement design involving 1,531 credit union members in St. Louis (2014–2015). Participants expressing interest in improving credit were randomly assigned to receive either an immediate offer of a CBL or an offer contingent on completing an online financial education course—creating a natural comparison group. Outcomes examined include credit score changes, the likelihood of having a credit score, delinquency behavior on both the CBL and other existing loans, and broader credit risk assessments.
On average, the CBL intervention did not significantly change credit scores across the full sample—yielding a near-zero average effect. However, more nuanced analysis using machine learning methods revealed heterogeneous effects: for individuals with low baseline installment credit activity (i.e., little or no prior debt), CBLs significantly improved scores and helped individuals enter the credit system. In contrast, among consumers with existing debts, CBLs led to increased delinquency on other loans, suggesting overextension and unintended negative spillovers.
Importantly, the study found that CBLs can enhance the precision of credit risk assessments: for many individuals with thin files, CBLs supply valuable payment information that improves predictive accuracy without distorting the overall credit scoring system. This means that, for the right borrowers, CBLs can meaningfully improve both personal credit histories and the functioning of credit markets.
The findings underscore that CBLs are not uniformly effective—their impact hinges on borrowers’ existing credit contexts. For previously unscored or low-credit individuals, CBLs help establish credit and improve scores. But for those already carrying debt, CBLs can exacerbate financial strain and harm credit performance. The authors suggest simple product design adjustments—like better borrower screening and thoughtful bureau reporting—to mitigate risks and maximize benefits. Overall, CBLs hold promise for enhancing financial inclusion when targeted appropriately, but without proper safeguards they may do more harm than good.