Bad credit, no problem? Credit and labor market consequences of bad credit reports

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Authors:

Will Dobbie, Assistant Professor of Economics and Public Affairs at the Woodrow Wilson School of Public and International Affairs, Princeton University
Paul Goldsmith-Pinkham, Economist, Research and Statistics Group, Federal Reserve Bank of New York
Neale Mahoney, Assistant Professor of Economics at the Booth School of Business, University of Chicago
Jae Song, Economist, Office of Disability Adjudication and Review, Social Security Administration

Abstract:

Credit reports are used in nearly all consumer lending decisions and, increasingly, in hiring decisions in the labor market, but the impact of a bad credit report is largely unknown. We study the effects of credit reports on financial and labor market outcomes using a difference-in-differences research design that compares changes in outcomes over time for Chapter 13 filers, whose personal bankruptcy flags are removed from credit reports after 7 years, to changes for Chapter 7 filers, whose personal bankruptcy flags are removed from credit reports after 10 years. Using credit bureau data, we show that the removal of a Chapter 13 bankruptcy flag leads to a large increase in credit limits and economically significant increases in credit card and mortgage borrowing. Using administrative tax records linked to personal bankruptcy records, we estimate a precise zero effect of flag removal on employment and earnings outcomes. We rationalize these contrasting results by showing that, conditional on basic observables, “hidden” bankruptcy flags are strongly correlated with adverse credit market outcomes but have no predictive power for labor market outcomes.