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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Citation

Meier, Stephan, Ben Levinger, and Marques Benton. "The Cost of Not Knowing the Score: Self-Estimated Credit Scores and Financial Outcomes." Journal of Family and Economic Issues 32, no. 4 (2014): 556-585.

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