Building a Credit History with Energy Efficiency Loans

by Elisabeth Johnson, Credit Builders Alliance

Energy efficiency loans reduce the barrier of high initial investment cost of the appliance or installation, but how can lenders in the energy efficiency industry solve other problems faced by families struggling to get by? One great way to leverage the impact of these loan products is to use them to improve financial inclusion and stability for low- and middle-income households by reporting the loan payments to the major credit bureaus and providing the borrower the opportunity to build a credit history.

Recent studies have found that 64 million Americans have no credit history, or so little that they don’t have a credit score, and that 56% of consumers have poor credit scores. These people are often the same low- and middle-income consumers relying on fringe financial services such as payday lenders and rent-to-own stores that don’t report positive payments, only delinquent accounts that go to collections. These individuals don’t have a way to start building positive credit; consequently, they pay more for financial services and utility deposits, and they have fewer choices for housing and even jobs.

Energy efficiency loans made to these households help the environment by reducing energy waste, but neglect to help these households build a credit history. When lenders report loans to the national credit bureaus, they give borrowers an opportunity to generate positive credit history with each on-time payment. Unique to energy efficiency finance, the reduction in energy costs means that the borrower is in the best position to make payments on time with their energy savings. Adding timely credit education, even reminders on a statement or by text message, can also help borrowers make the most out of this credit-building opportunity.

Since 2006, the Credit Builders Alliance (CBA) has been able to remove barriers and provide technical assistance to nonprofits to report loan payments to the national credit bureaus. For many borrowers, these payments have been their first opportunity to put positive credit information on their credit reports. Recently, CBA began a pilot program to support eight affordable housing organizations with reporting their tenants’ monthly rent payments to Experian RentBureau for inclusion on their credit reports. Reporting existing rent payments creates the ability to build credit history without taking on any new debt.

We invite all nonprofit organizations that provide loans to consumers and/or small businesses to learn more about the credit-reporting process by contacting us at reporter@creditbuildersalliance.org or (202) 730-9390.