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

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journal contribution
posted on 2023-06-07, 07:43 authored by Andres Liberman, Daniel Paravisini, Vikram Pathania
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.

History

Publication status

  • Published

File Version

  • Accepted version

Journal

Journal of Financial Economics

ISSN

0304-405X

Publisher

Elsevier

Department affiliated with

  • Economics Publications

Full text available

  • Yes

Peer reviewed?

  • Yes

Legacy Posted Date

2020-08-21

First Open Access (FOA) Date

2023-01-19

First Compliant Deposit (FCD) Date

2020-08-21

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