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Self-Fulfilling Credit Scores

Author

Listed:
  • Victor Duarte
  • Julia Fonseca

Abstract

A decline in credit scores can worsen the borrower's financial position, making default a self-fulfilling prophecy. We estimate the causal effect of credit scores on default using a rule that counts multiple inquiries within 14 days as one, moving scores without changing credit reports. Regression discontinuity estimates around the 14-day cut-off show that an additional counted inquiry lowers scores by five points on average. Default does not respond among consumers with clean records, but rises by 3.2 percentage points over two years among those with prior derogatories. For these consumers, at least 13 percent of the relationship between scores and default is self-fulfilling. We show that scorers would want to limit self-fulfilling defaults if their objective is forecast accuracy, but not if it is separating defaulters from non-defaulters, because that objective rewards the score for the defaults it causes.

Suggested Citation

  • Victor Duarte & Julia Fonseca, 2026. "Self-Fulfilling Credit Scores," NBER Working Papers 35508, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35508
    Note: CF PE
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    More about this item

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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