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

53 Pages Posted: 2 Aug 2019 Last revised: 2 Nov 2020

See all articles by Jeremy Burke

Jeremy Burke

Center for Economic and Social Research (CESR)

Julian C. Jamison

University of Exeter Business School - Department of Economics; World Bank eMBeD (Mind, Behavior, and Development); Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL); Innovations for Poverty Action

Dean S. Karlan

Northwestern University - Kellogg School of Management; Yale University; Innovations for Poverty Action; Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Kata Mihaly

RAND Corporation

Jonathan Zinman

Dartmouth College; Innovations for Poverty Action; Jameel Poverty Action Lab; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2019

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.

Keywords: consumer finance, credit invisibles, credit scoring, household finance, screening, subprime, thin file

JEL Classification: D12, G14, G21

Suggested Citation

Burke, Jeremy and Jamison, Julian C. and Karlan, Dean S. and Mihaly, Kata and Zinman, Jonathan, Credit Building or Credit Crumbling? A Credit Builder Loan's Effects on Consumer Behavior, Credit Scores and Their Predictive Power (July 2019). CEPR Discussion Paper No. DP13884, Available at SSRN: https://ssrn.com/abstract=3428408

Jeremy Burke (Contact Author)

Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

Julian C. Jamison

University of Exeter Business School - Department of Economics ( email )

Streatham Court
Exeter, EX4 4RJ
United Kingdom

World Bank eMBeD (Mind, Behavior, and Development) ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL) ( email )

30 Wadsworth Street, E53-320
77 Massachusetts Avenue
Cambridge, MA 02142
United States

Innovations for Poverty Action ( email )

1731 Connecticut Ave, 4th floor
New Haven, CT 20009
United States

Dean S. Karlan

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Yale University ( email )

Box 208269
New Haven, CT 06520-8269
United States

Innovations for Poverty Action ( email )

1731 Connecticut Ave, 4th floor
New Haven, CT 20009
United States

Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL) ( email )

E60-246
77 Massachusetts Avenue
Cambridge, MA 02139
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Kata Mihaly

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

Jonathan Zinman

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-0075 (Phone)

HOME PAGE: http://https://sites.dartmouth.edu/jzinman/

Innovations for Poverty Action

1731 Connecticut Ave, 4th floor
New Haven, CT 20009
United States

Jameel Poverty Action Lab

E60-246
77 Massachusetts Avenue
Cambridge, MA 02139
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
0
Abstract Views
169
PlumX Metrics