Credit Building or Credit Crumbling? A Credit Builder Loan’s Effects on Consumer Behavior, Credit Scores and Their Predictive

Dean Karlan, Jeremy Burke, Julian C. Jamison, Kata Mihaly and Jonathan Zinman

No 13884, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: How does the large market for credit score improvement products affect consumers and market efficiency? For consumers, we use a randomized encouragement design on a standard credit builder loan (CBL) and find null average effects on scores. But a generalized random forest algorithm finds important heterogeneity, most starkly with respect to baseline installment credit activity. CBLs induce delinquency on pre-existing loan obligations, suggesting that even a seemingly modest additional claim on monthly cash flows is too much for many consumers to manage. For the market, CBL take-up reveals information: takers experience future score improvements relative to non-takers, which, given null average treatment effects, implies positive selection. However, we find suggestive evidence that the CBL weakens the score’s power for predicting default in some cases. We propose simple changes, to CBL provider strategy and credit bureau reporting categories, that could produce more uniformly positive effects for both individuals and the market.

Keywords: Subprime; Thin file; Credit scoring; Screening; Credit invisibles; Household finance; Consumer finance (search for similar items in EconPapers)
JEL-codes: D12 G14 G21 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-ban, nep-exp and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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