High-Cost Debt and Perceived Creditworthiness: Evidence from the U.K.

67 Pages Posted: 20 Jun 2016 Last revised: 4 Feb 2020

See all articles by Andres Liberman

Andres Liberman

New York University (NYU) - Department of Finance

Daniel Paravisini

London School of Economics & Political Science (LSE)

Vikram Pathania

University of Sussex - Department of Economics

Date Written: June 1, 2018

Abstract

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

Liberman, Andres and Paravisini, Daniel and Pathania, Vikram, High-Cost Debt and Perceived Creditworthiness: Evidence from the U.K. (June 1, 2018). Available at SSRN: https://ssrn.com/abstract=2797383 or http://dx.doi.org/10.2139/ssrn.2797383

Andres Liberman (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

HOME PAGE: http://pages.stern.nyu.edu/~aliberma/

Daniel Paravisini

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Vikram Pathania

University of Sussex - Department of Economics ( email )

Falmer, Brighton BN1 9SL
United Kingdom

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