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Discussion Paper Details

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Title: Credit Building or Credit Crumbling? A Credit Builder Loan's Effects on Consumer Behavior, Credit Scores and Their Predictive Power

Author(s): Jeremy Burke, Julian C. Jamison, Dean S. Karlan, Kata Mihaly and Jonathan Zinman

Publication Date: July 2019

Keyword(s): consumer finance, credit invisibles, credit scoring, household finance, screening, subprime and thin file

Programme Area(s): Financial Economics and Public Economics

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.

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Bibliographic Reference

Burke, J, Jamison, J, Karlan, D, Mihaly, K and Zinman, J. 2019. 'Credit Building or Credit Crumbling? A Credit Builder Loan's Effects on Consumer Behavior, Credit Scores and Their Predictive Power'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13884