Born to Be (sub)Prime: An Exploratory Analysis

Abstract

We study how inheriting parents’ credit histories affects credit scores, access to credit, and subsequent experiences of young indi- viduals entering the credit market. First, having an inherited credit history significantly positively affects credit scores at entry. Second, initial credit scores are very persistent. Third, inherited credit histo- ries only affect outcomes through the initial credit score distribution. Finally, initial credit scores have significant persistent effects on credit use and access, such as having a mortgage or credit card penetration and utilization rate. Our results point to the importance of initial con- ditions in credit markets and are consistent with mechanisms based on multiplicity of equilibria and self-fulfilling liquidity traps in which lack of access to credit due to low credit scores re-affirms the low credit score ranking of an individual.