The Cost of Not Knowing the Score: Self-Estimated Credit Scores and Financial Outcomes |
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Authors: | Benjamin?Levinger author-information" > author-information__contact u-icon-before" > mailto:ben_levinger@hks.harvard.edu" title=" ben_levinger@hks.harvard.edu" itemprop=" email" data-track=" click" data-track-action=" Email author" data-track-label=" " >Email author,Marques?Benton,Stephan?Meier |
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Affiliation: | (1) Harvard Kennedy School of Government, 79 John F. Kennedy Street, Cambridge, MA 02138, USA;(2) Federal Reserve Bank of Boston, 600 Atlantic Avenue, Boston, MA 02210, USA;(3) Graduate School of Business, Columbia University, 710 Uris Hall, 3022 Broadway, New York, NY 10027, USA |
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Abstract: | This study analyzes consumers’ knowledge of their own credit situation and tests whether a lack of knowledge affects financial outcomes. The unique dataset from survey and credit report data includes self-estimates of credit scores and actual scores from a low-to-moderate income sample. We argue and show empirically that many respondents don’t know their credit score and generally underestimate their creditworthiness. Furthermore, our evidence suggests that this biased self-assessment may explain differences in perceived credit constraints and credit contracts, specifically credit card interest rates. Our research suggests that an important aspect of financial literacy is self-assessment, and that it is important to encourage consumers to regularly check their credit reports and scores so as to better understand their actual creditworthiness. |
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