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Will a new Credit Builder product improve FICO Scores?

GladRobot
New Visitor

Will a new Credit Builder product improve FICO Scores?

I'm looking to create a Credit Builder loan and am curious how much positive impact it will have on their FICO Score?

 

PRODUCT: A Bullet Loan where a payment of the entire principal and interest of the loan is due at the end of the loan term (1 year)

LOAN SIZE: $2,000 - $3,000 (much larger than other Credit Builder loans around $300 to $1,000)

APR: 20% Max

ADDITIONAL FEES: $0

SECURITY: None

CREDIT REPORT FILING: Monthly to relay that the current terms of the agreement are met

 

As my loans are larger than normal but only have a single payment coming at the end, is this better or worse than existing products? Any guesses on the FICO impact for those who are credit invisible or for someone recovering from bad credit?

3 REPLIES 3
Dumbee
Established Contributor

Re: Will a new Credit Builder product improve FICO Scores?

This is no bueno


Smiley Embarassed
Personal/40.15K Biz/23K POT/17K
Message 2 of 4
GladRobot
New Visitor

Re: Will a new Credit Builder product improve FICO Scores?


@Dumbee wrote:

This is no bueno


why?

Message 3 of 4
iv
Valued Contributor

Re: Will a new Credit Builder product improve FICO Scores?


@GladRobot wrote:

I'm looking to create a Credit Builder loan and am curious how much positive impact it will have on their FICO Score?


So you plan to enter the retail lending market? Ok... I assume you know it's a bit more involved than just having some capital and a vague idea, right?

 


@GladRobot wrote:

 

PRODUCT: A Bullet Loan where a payment of the entire principal and interest of the loan is due at the end of the loan term (1 year)

LOAN SIZE: $2,000 - $3,000 (much larger than other Credit Builder loans around $300 to $1,000)

APR: 20% Max

ADDITIONAL FEES: $0

SECURITY: None

CREDIT REPORT FILING: Monthly to relay that the current terms of the agreement are met


This is... not a good option for, well, anyone. Especially someone trying to build or rebuild credit.

High interest rate, unnecessarily high principal, balloon payment (making the actual interest payment much more than a regular 12-month amortized loan), and the worst part is reporting 100% loan utilization for the entire time the loan is open!

 

That's frankly, terrible.

 


@GladRobot wrote:

 

As my loans are larger than normal but only have a single payment coming at the end, is this better or worse than existing products? Any guesses on the FICO impact for those who are credit invisible or for someone recovering from bad credit?


Worse. In pretty much all ways.

 

The balloon payment ("single payment coming at the end") results in a client with a $3,000 loan at 20% APR, paying a lump sum of $3,600 at the end of the term - vs a standard amortized 20% APR at $277.90/month ($3,335 total for the year).

 

The balloon payment also means that you open the loan at $3,000 balance of $3,000 original, and continue to report that full 100% utilization for the full 12 months of the loan, until finally reporting it paid/closed.  This is terrible for scoring, since much of the benefit from a loan like this comes once the loan is reporting more than 90% paid-off (less than $270 remaining balance, in this example).

 

The unnecessarily high loan amounts ($2,000-$3,000) are not a benefit to a "credit invisible" client - the dollar amount of the loan doesn't matter - the existence of a positive account, and how close it is to being paid off (while remaining open) is what matters.  Otherwise, the high loan amount (plus the balloon payment) just cranks up the interest the client pays, without any actual benefit.  (There's a borderline case where loan amount could have a small effect, but it only applies if the client already has existing open loans, with very little paid down on them.)

 

 

If you really wanted to design a new "loan" product specifically to boost low or non-existant scores (not sure why, since that market seems fairly well-supplied), you'd want to do something like this:

 

  • $1,000 max (no point in going higher in almost all cases).
  • Require pre-paid interest and/or fees up front (like points on a mortage) - making sure it's enough to cover your costs, and the risk of losing 9% principal on some number of the loans (and whatever profit % you are aiming for... but keep it reasonable).
  • Make the first monthly payment a flat 91% of the loan amount (plus the interest/fees pre-pay) - the 91% never even needs to be in the client's hands, just apply it to the first payment directly to reduce your risk.
  • Allow the client to amortize the remainder over a term of their choice (up to 3-5 years).
  • Continue to report the open loan, each (tiny) monthly payment, and the current single-digit utilization % for the life of the selected loan term.
  • Profit?

(Even with all that, you'd be competing with lenders that offer SSLs at much lower effective rates... doesn't seem worth it to me.)

 

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