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What effects credit scores

what effects credit scores

Effects of Credit Scores on Consumer Payment Choice

Public Policy Discussion Paper No. 12-1

This paper investigates the effects of credit scores on consumer payment behavior, especially on

debit and credit card use. Anecdotally, a negative relationship between debit card use and

credit score has been reported; however, it is not clear whether that relationship is related to

other factors, such as education or income, or whether it is a mere correlation. We use a new

consumer survey dataset to examine whether this negative relationship holds after controlling

for various consumer characteristics, including demographic and financial characteristics,

consumers' perceptions toward payment methods, and card reward status. The results based

on a single-year survey as well as on panel data suggest that there is a significant negative

relationship between debit card use and credit score even after controlling for various

characteristics. We supplement the analysis with evidence from Equifax data. The results

indicate that an increase in consumers' cost of debit cards—in response to regulatory changes,

for example—would have an adverse effect on low-credit-score consumers (typically those with

lower incomes and less education).

We then investigate what credit score implies. If credit score significantly influences consumer

access to credit cards, credit limits, or the cost of credit cards, then the negative relationship

likely results from supply-side constraints. If a lower credit score is associated with differences

in underlying preferences, then the negative relationship is likely due to demand-side effects.

Preliminary evidence strongly suggests that supply-side factors play an important role in the

cost of credit and in access to credit.

Keywords: credit scores, debit cards, payment behavior

JEL Classifications: D12, D14, G21

Full-text paper

Category: Credit

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