Review of Financial Studies Vol. 36 No. 4 2023

Credit Building or Credit Crumbling? A Credit Builder Loan’s Effects on Consumer Behavior and Market Efficiency in the United States

Jeremy Burke¹; Julian Jamison²; Dean Karlan³; Kata Mihaly⁴; Jonathan Zinman⁵

¹ University of Southern California Center for Economic and Social Research, , USA · ² University of Exeter Business School , UK · ³ Northwestern University Kellogg School of Management, , USA · ⁴ RAND Corporation , USA · ⁵ Dartmouth College USA

Abstract

A randomized encouragement design yields null average effects of a credit builder loan (CBL) on consumer credit scores. But machine learning algorithms indicate the nulls are due to stark, offsetting treatment effects depending on baseline installment credit activity. Delinquency on preexisting loan obligations drives the negative effects, suggesting that adding a CBL overextends some consumers and generates negative externalities on other lenders. More favorably for the market, CBL take-up generates positive selection on score improvements. Simple changes to CBL practice, particularly to provider screening and credit bureau reporting, could ameliorate the negative effects for consumers and the market.

DOI

10.1093/rfs/hhac060

Volume

36

Issue

4

Pages

1585-1620

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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