People with bad credit scores are more impatient and are more likely to choose immediate rewards rather than wait for a larger reward later, a new study has found.
Stephan Meier from Columbia University and Charles Sprenger from Stanford University recruited 437 low-to-moderate income people during tax season at a community centre in Boston that was offering tax preparation help.Each person was given a questionnaire in which they made choices between a smaller, immediate reward and a larger reward later. This is a common test for seeing if people are willing to delay gratification. The questions offer different time periods and different amounts. The participants also agreed to let the researchers access their credit scores.
“Most often, the reasons economists put forward are, maybe there was not enough screening for mortgage applicants, or securitization, or other institutional reasons,” Meier, the lead author, said.
The researchers found that impatient people had lower credit scores. A low credit score can indicate some problems with credit in the past, like failing to pay bills or defaulting on a mortgage.
“Conceptually, it does make sense that how people discount the future, i.e. how impatient they are, affects their decision to default on their loans,” Meier said.
“Individuals accumulate debt and then have to decide whether to repay the money or use the money for something else?” he said.
If they don’t pay off their debt, they will have short-term benefits, as, any cash on hand is available for something else, the costs and problems come much later, when a landlord, mortgage lender, or someone else sees their bad credit report.
The study will be published in Psychological Science.