Ariel Zetlin-Jones Awarded NSF Grant to Study Ways to Expand Access to Credit for American Households

The 2008 financial crisis, the preceding credit boom, and the subsequent credit contraction have highlighted the importance of access to credit for individual households for the health of the financial system and the economy. To help improve credit markets, the National Science Foundation recently awarded a two-year grant to Ariel Zetlin-Jones, Associate Professor of Economics at the Tepper School of Business along with his co-author, Natalia Kovrijnykh at Arizona State University to research key determinants of American households’ access to credit.

“There is growing interest in among public and private institutions to better understand how individuals initiate and grow their access to credit. We observe private lenders seeking out and using new, non-traditional sources of information to evaluate individuals’ credit risk particularly for new borrowers who have not yet established their credit record. Our research aims to shed light on the impact of these changes and on whether policymakers should permit the use of this information or not,” states Zetlin-Jones.

The project uses a novel dataset obtained from a credit reporting agency that reveals the behavior of emerging borrowers (borrowers who have only recently obtained their first line of credit or credit card) and their creditors. Critically, this data allows for an examination of the behavior of individual lines of credit (credit cards) for borrowers over time. Most notably, Zetlin-Jones and his co-author show that emerging borrowers who open additional credit cards see substantial increases in credit granted by their original, or incumbent lenders.

Zetlin-Jones explains, “There is a conventional wisdom from places like CreditKarma.com that opening a new credit card and not using it is good for your credit score, which presumably improves your access to credit. Our analysis sheds light on how strong this effect is and why opening a new card may be so beneficial for emerging borrowers. In this way, the research develops a deeper understanding of which actions are associated with improved access to credit and how recent developments in consumer credit markets may affect emerging borrowers.”

Zetlin-Jones and his co-authors hypothesize that emerging borrowers with access to multiple lenders accumulate credit quickly because their credit history aggregates information across their lenders. The research proposes a theory consistent with this hypothesis and the authors’ new evidence on emerging borrowers and then proposes to use this theory to design better policies aimed at expanding American households’ access to credit.