Credit Score Doctors

47 Pages Posted: 20 May 2020

See all articles by Luojia Hu

Luojia Hu

Federal Reserve Bank of Chicago

Xing Huang

Washington University in St. Louis - Olin Business School

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Russian Presidential Academy of National Economy and Public Administration (RANEPA); Centre for Economic Policy Research (CEPR)

Date Written: February 25, 2020

Abstract

We study how the existence of cutoffs in credit scores affects the behavior of homebuyers. Borrowers are more likely to purchase houses after their credit scores cross over a cutoff to qualify them for a higher credit score bin. However, the credit accounts of these individuals (crossover group) are more likely to become delinquent within four years following home purchases than the accounts of those who had stayed in the same bin (non-crossover group). The effect is not only concentrated in subprime bins, but in other bins as well. It is neither limited to pre-crisis period nor curtailed by post-bust reforms. Using recent house price growth to proxy for the incentives for home purchases, we find that the gap in the delinquency rates between crossover and non-crossover groups is larger for areas with higher recent house price growth. Overall, our results indicate that the credit score at the time of home purchase may not be sufficiently informative because of individuals' strategic behavior, and suggest the importance of using the longer history of credit scores rather than just the latest draw in making lending decisions.

Suggested Citation

Hu, Luojia and Huang, Xing and Simonov, Andrei, Credit Score Doctors (February 25, 2020). FRB of Chicago Working Paper No. 2020-07, Available at SSRN: https://ssrn.com/abstract=3584794 or http://dx.doi.org/10.21033/wp-2020-07

Luojia Hu (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Xing Huang

Washington University in St. Louis - Olin Business School ( email )

Simon Hall 211
Washington University in St. Louis
St. Louis, MO 63130
United States

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management ( email )

645 N. Shaw Lane, 321 Eppley Center
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.andreisimonov.com

Russian Presidential Academy of National Economy and Public Administration (RANEPA) ( email )

Vernadskogo Prospect 82
Moscow, 119571
Russia

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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