While patience may be a virtue, a new study is showing that it can also help your credit score.
Article By David Mielach
According to research by two economists at Boston’s Federal Reserve Center for Behavioral Economics and Decision Making, people who were willing to wait for long-term benefits had better credit scores than people who accepted immediate rewards.
“Most often, the reasons economists put forward (for why people default) are, maybe there was not enough screening for mortgage applicants, or securitization, or other institutional reasons,” said Stephan Meier, co-author of the study.”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.”
The research by Meier, an associate professor at the Columbia University Business School, and Charles Sprenger, an assistant professor at Stanford University, challenges these traditionally held beliefs about why people fall into poor economic standing
In their research, Meier and Sprenger surveyed 437 low- to moderate-income families seeking tax preparation help. In a questionnaire the researchers asked participants if they would accept a small and immediate reward over a potentially larger reward they had to wait for. After being allowed to access the credit scores of these participants, the researchers found a correlation between higher credit scores and people who were willing to accept a long-term benefit. Additionally, impatient participants who accepted rewards with immediate gratification were found to have lower credit scores.
“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.” The findings of this study will be published in the upcoming issue of Psychological Science, which is a journal of the Association for Psychological Science.