Credit Market Consequences of Credit Flag Removals

Abstract

This paper estimates the impact of a bad credit report on financial outcomes by exploiting exogenous variation in the timing of credit flag removals. Credit flags are removed from credit reports after seven years, generating an immediate change in the information available to the credit market. We study the effects of credit flag removal using a sample of 246,000 individuals whose flags were removed between 2004 and 2013. We find that the removal of bankruptcy and charge-off flags result in increased credit scores. These increased scores are associated with increases in the number of credit card lines, credit card limits, and credit card balances. Results from a second identification strategy exploiting a sudden change in how credit flags are coded yields similar results. The findings support the view that credit reporting decisions have direct credit market consequences for consumers.

Keywords: Credit flags, credit reports