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

50 Pages Posted: 7 Aug 2019 Last revised: 6 May 2023

See all articles by Jeremy Burke

Jeremy Burke

Center for Economic and Social Research (CESR)

Julian Jamison

University of Exeter

Dean Karlan

Northwestern University

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.

Suggested Citation

Burke, Jeremy and Jamison, Julian and Karlan, Dean 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). NBER Working Paper No. w26110, Available at SSRN: https://ssrn.com/abstract=3432153

Jeremy Burke (Contact Author)

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

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Julian Jamison

University of Exeter ( email )

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Dean Karlan

Northwestern University ( email )

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Kata Mihaly

RAND Corporation ( email )

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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

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Jameel Poverty Action Lab

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United States

National Bureau of Economic Research (NBER)

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United States

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