Where Credit is Due: The Relationship between Family Background and Credit Health

Abstract

Using a novel dataset that links an individual’s background, education, and federal financial aid participation to her future credit records, we document that, even though it is not, and cannot be, used by credit agencies in assigning risk, family background is a strong predictor of early-career credit health (that is, an individual’s credit score when she is around 30 years old). This relationship persists even after controlling for achievement, a range of postsecondary schooling variables (e.g., educational attainment, institutional quality, undergraduate borrowing), and key elements of early credit histories (e.g., default on educational loans). Interestingly, undergraduate borrowing, which is not underwritten, correlates with background and appears to explain some of the difference in scores. In light of the many important contexts in which credit scores are relied upon to evaluate consumers (e.g., lending, insurance, employment), our study offers a new dimension in understanding the transmission of socioeconomic status across generations.