Impatient people have lower credit scores: study

Is there a psychological reason why people default on their mortgages? A new study, which will be published in an upcoming issue of Psychological Science, a journal of the Association for Psychological Science, finds that people with bad credit scores are more impatient – more likely to choose immediate rewards rather than wait for a larger reward later.

The new paper is by two economists who were working at the Federal Reserve’s Center for Behavioral Economics and Decisionmaking in Boston at the time they did the research. People at the Fed are very interested in understanding how the default crisis came about. “Most often, the reasons economists put forward are, maybe there was not enough screening for mortgage applicants, or securitization, or other institutional reasons,” says Stephan Meier, who is now at Columbia University. His coauthor, Charles Sprenger, is at Stanford University. ”That’s definitely important, but in the end humans make those repayment decisions. So there must be more psychological factors that explain how people make those decisions to default or not?”

During tax season, Meier and Sprenger recruited 437 low-to-moderate income people at a community center 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 .

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 says. “Individuals accumulate debt and then have to decide whether to repay the money or use the money for something else?” If they don’t pay off their debt, they will have short-term benefits – any cash on hand is available for something else – but the costs/problems come much later, when a landlord, mortgage lender, or someone else sees their bad credit report.

Meier acknowledges that defaulting on a loan isn’t always a deliberate choice. People may default because they lose their job, for example. “But there is a little bit of strategic defaulting going on, where some people make this cost-benefit analysis” – those individuals rather have more money now and deal with the repercussions later.

Related Stories

Refunds don't always help lower-income taxpayers

May 09, 2011

Getting a tax refund from the federal government at the end of the year may not always be the best option for lower-income populations, according to the research from Harris School economist Damon Jones.

Is there a hidden bias against creativity?

Nov 18, 2011

CEOs, teachers, and leaders claim they want creative ideas to solve problems. But creative ideas are rejected all the time. A new study, which will be published in an upcoming issue of Psychological Science, a journal of the ...

Can aptitude tests really predict your performance?

Jun 17, 2011

(Medical Xpress) -- Colleges, employers, and the military all use aptitude tests to predict how well someone might do. In recent years, some critics of these tests have said there isn’t much difference in performance ...

Recommended for you

Self-compassion key to positive body image and coping

19 hours ago

Women who accept and tolerate their imperfections appear to have a more positive body image despite their body mass index (BMI) and are better able to handle personal disappointments and setbacks in their daily lives.

Experiences trump things, even before purchase

Sep 29, 2014

(HealthDay)—People derive value from the anticipation of purchasing something, and this anticipation tends to be greater for an experiential purchase than for a material purchase, according to a study published ...

User comments