Credit Building or Credit Crumbling? A Credit Builder Loan’s Effects on Consumer Behavior and Market Efficiency in the United States
Burke, J; Jamison, J; Karlan, D; et al.Mihaly, K; Zinman, J
Date: 2 September 2022
Article
Journal
The Review of Financial Studies
Publisher
Oxford University Press (OUP) / Society for Financial Studies
Publisher DOI
Abstract
A randomized encouragement design yields null average effects of a credit builder loan (CBL) on consumer credit scores. But machine learning algorithms indicate the nulls are due to stark, offsetting treatment effects depending on baseline installment credit activity. Delinquency on preexisting loan obligations drives the negative ...
A randomized encouragement design yields null average effects of a credit builder loan (CBL) on consumer credit scores. But machine learning algorithms indicate the nulls are due to stark, offsetting treatment effects depending on baseline installment credit activity. Delinquency on preexisting loan obligations drives the negative effects, suggesting that adding a CBL overextends some consumers and generates negative externalities on other lenders. More favorably for the market, CBL take-up generates positive selection on score improvements. Simple changes to CBL practice, particularly to provider screening and credit bureau reporting, could ameliorate the negative effects for consumers and the market.
Economics
Faculty of Environment, Science and Economy
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