High-cost debt and perceived creditworthiness: evidence from the UK

Liberman, Andres, Paravisini, Daniel and Pathania, Vikram (2021) High-cost debt and perceived creditworthiness: evidence from the UK. Journal of Financial Economics. ISSN 0304-405X

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Abstract

We show that high-cost debt exacerbates financial constraints by affecting lenders’ perception of credit risk. Using data from a high-cost lender in the UK, we show that high-cost credit reduces applicants’ credit score and future bank credit even though it does not affect future debt repayment. These effects are not present among borrowers who are already tagged as high risk at application, consistent with high-cost credit affecting lenders’ beliefs about borrowers’ creditworthiness. The results highlight a novel channel through which high-cost credit can harm consumers’ financial health: a self-reinforcing stigma of high risk.

Item Type: Article
Keywords: Consumer finance, credit scores, credit supply
Schools and Departments: University of Sussex Business School > Economics
Subjects: H Social Sciences > HG Finance > HG0179 Personal finance
H Social Sciences > HG Finance > HG3691 Credit. Debt. Loans
Depositing User: Vikram Pathania
Date Deposited: 21 Aug 2020 10:01
Last Modified: 30 Jul 2021 08:45
URI: http://sro.sussex.ac.uk/id/eprint/93177

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