Impact of Information Technology on Consumer Lending, The

Innovation and Economic Growth

Article Snapshot


Liran Einav, Mark Jenkins and Jonathan Levin


Working Paper, 2012


This paper examines the effects of the adoption of credit score use by lenders making loans for automobiles.

Policy Relevance

Greater use of credit scoring seems to lead to larger loans for safe borrowers and reduced credit for risky borrowers.

Main Points

  • Lenders who made loans began using credit score data, like FICO, in the early 2000s.

    • These scores rely on data about a consumer’s finances and past credit behavior; previously lenders were more reliant on interviews.
  • After the adoption of credit score usage in lending decisions, lender profits increased (on average) by $1000 per loan; average loan size was $9000.  The profits came from two key changes in loan characteristics.

    • High-risk borrowers were much less likely to default; credit scores allowed lenders to screen the highest-risk borrowers and require a large down payment, driving away likely defaulters.
    • Credit scoring also permitted the reliable identification of lower-risk borrowers.  Lenders extended these borrowers larger loans (for more expensive cars); all else equal, total profits are higher on larger loans.
  • Before credit scoring, default rates varied widely from lender to lender; after credit scoring was adopted, this variation mostly disappeared.

    • Profits increased for all lenders, but increased more for lenders who previously had experienced high default rates.

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