High-Cost Debt and Perceived Creditworthiness: Evidence from the U.K.
67 Pages Posted: 20 Jun 2016 Last revised: 4 Feb 2020
Date Written: June 1, 2018
We show that high-cost debt exacerbates financial constraints by affecting lenders’ perception of credit risk. Using data from a high-cost lender in the UK, we show that high-cost credit reduces applicants’ credit score and future bank credit even though it does not affect future debt repayment. These effects are not present among borrowers who are already tagged as high risk at application, consistent with high-cost credit affecting lenders’ beliefs about borrowers’ creditworthiness. The results highlight a novel channel through which high-cost credit can harm consumers’ financial health: a self-reinforcing stigma of high risk.
Keywords: Consumer finance, credit scores, credit supply
JEL Classification: D14, G21, D91
Suggested Citation: Suggested Citation