Childhood marks the beginning of credit scoring formation
The Opportunity Insights study, a comprehensive research project, has shed light on the factors influencing adult credit access. The study reveals that both childhood environment and family background play significant roles in shaping an individual's credit behavior.
Childhood Environment: Geography and Social Capital
The study found that growing up in areas with high loan repayment rates can significantly impact an individual's credit behavior as an adult. For instance, spending an additional year in Bergen County, New Jersey, a high loan repayment area, compared to a lower repayment area like Baltimore, increases the likelihood of loan repayment by 0.4 percentage points.
Moreover, the study shows that the environment shapes social and cultural capital, which can impact credit behavior. Places that promote upward mobility tend to enhance credit access and repayment habits.
Family Background: Parental Credit Score and Income
A parent's credit score is a strong predictor of a child's future credit behavior. Moving from the bottom to the top of the parental credit score distribution reduces the likelihood of falling 90+ days behind on loan repayments in early adulthood by 50 percentage points. This effect remains significant even when accounting for the individual's own income and financial situation.
While parental income is a factor, the study shows that childhood environment and family credit history are crucial in shaping adult credit access, even beyond individual income levels.
Addressing Disparities Early
The findings of the Opportunity Insights study suggest that addressing disparities in credit access early in life could improve adult credit outcomes. This could be achieved by focusing on community investments and promoting environments that foster responsible financial behavior.
Industry experts, such as Brian Riley, Director of Credit at Javelin Strategy & Research, and Ben Danner, Senior Analyst, Credit and Commercial at Javelin, emphasize the importance of teaching responsible borrowing and repayment behaviors early in life, and investing in early financial literacy and education. Danner even suggests that every high school should have a course on household budgeting and financial planning, including how credit scores work.
While ZIP codes can lead to a set of sociological issues in credit scoring, which are inappropriate for the clinical requirement of credit risk assessment, the law prohibits credit scoring from considering certain socioeconomic factors. Top credit scoring companies refrain from including certain items protected by law in their scoring methods.
However, alternative credit scoring can be influenced by social or economic factors, which may breach existing rules. The study conducted by Opportunity Insights found that credit scores tend to solidify by a person's mid-twenties, underscoring the importance of early intervention.
In conclusion, the Opportunity Insights study underscores the importance of addressing disparities in credit access early in life to improve adult credit outcomes. This can be achieved by focusing on community investments and promoting environments that foster responsible financial behavior, and by teaching responsible borrowing and repayment behaviors early in life.
- To enhance personal-finance outcomes in adulthood, it's crucial to address disparities early in life, such as focusing on community investments, promoting responsible financial behavior, and teaching financial literacy.
- Education-and-self-development, particularly in financial literacy and responsible borrowing, plays a significant role in shaping an individual's credit behavior and access, as highlighted by the Opportunity Insights study.
