Building Credit Histories with Heterogeneously-Informed Lenders
The importance of credit scores and credit histories in determining individuals’ access to credit is well understood in the literature. This project models credit histories as a way of aggregating information among various potential lenders, and is the first one to explicitly model how borrowers may affect this information aggregation through sequential borrowing. We show that the least risky borrowers may choose to take on loans to signal their credit-worthiness to other lenders. We interpret this mechanism as building a credit history. This mechanism captures conventional wisdom present in consumer credit markets, but absent in the academic discourse, that one way to quickly build a positive credit history is to take on a loan. We plan to exploit novel data on individual consumers’ credit records in the U.S. to evaluate the importance of our mechanism in the data.
