Effects of Entering the Credit Market in a Recession
AbstractDo consumers who enter the credit market during bad economic conditions fare better or worse in their credit lives? Every year a significant share of the adult population enters the credit market by opening a credit account. This initial demand for credit is unrelated to the business cycle. Rather, it is part of the natural progression into adulthood that requires individuals to take out loans to, e.g., attend college or purchase an automobile. The fact remains that some individuals enter the credit market in good economies and some enter in bad economies. Little is known about how the timing of credit entry affects an individual’s credit profile.
The question is motivated by an extensive literature in labor economics that considers the effects of graduating in a recession on the labor market outcomes of individuals. We consider the credit analog to the labor literature on initial conditions and long-term outcomes, which has received little attention in the household finance literature. Consumers seeking to acquire credit for the first time in a recession may end up with worse credit products with less favorable terms, which may negatively impact their ability to build credit, particularly if they struggle to repay. On the other hand, interest rates are generally low during recessions, and potentially harmful credit products are often more prevalent during boom years prior to a recession, particularly in the years prior to the 2007-2009 recession.
We use detailed administrative data on individual credit tradelines from the CFPB’s Consumer Credit Panel, which allows us to identify precisely when consumers first acquire a credit account, and how their credit lives evolve after that point.