Tuesday, June 03, 2008

Vanessa Gail Perry says that People Overestimate their own Credit Quality

My colleague Vanessa Perry has a study on people's perceptions of their own credit quality:

ScienceDaily (Jun. 2, 2008) — A new study examined consumers’ self-assessments of their credit rating and found that respondents were more likely to believe they had average or above average credit and those who overestimated their credit quality were less likely to budget, save, and invest regularly.

The study's author, Vanessa Gail Perry, Assistant Professor at the George Washington University School of Business, concludes that "Overestimating credit ratings is partly a function of a lack of financial sophistication. In addition, it appears that people who have overestimated their credit rating take less care in managing their finances.”

Professor Perry analyzed data from the Freddie Mac Consumer Credit Survey. The survey collected data on attitudes, behaviors, knowledge and experiences with credit and financial management from around 23,000 people. Results indicate that approximately 32 percent of respondents overestimated their credit ratings, while only four percent underestimated their credit ratings. The findings support previous studies in judgment and decision-making that show that individuals are more likely to be overconfident about their knowledge or abilities.

Those who overestimated their credit ratings had lower incomes, less formal education, and were less likely to own their homes. They were also more likely to be African-American, Hispanic, or female. One possible explanation for these results is that minority consumers in general have less experience with financial markets which in turn affects their tendency to overestimate their credit rating.


doc said...

A world in which "all the women are strong, all the men are good-looking" and all families have above-average credit scores...

(with apologies to Garrison Keillor.)

Uncle Billy Climbs Mt.Pelerin said...

Those who evaluate others' credit seem to fall into that same trap.
S&P? Moody's? Etc.

Anonymous said...

Seems easy enough to fix. Just give people access to their credit scores.

piglet said...

"Those who overestimated their credit ratings had lower incomes, less formal education, and were less likely to own their homes. They were also more likely to be African-American, Hispanic, or female."

You don't have to be a cynic to suspect that this outcome is exactly (part of) the purpose of those credit ratings. Inhowfar they are actually related to a person's ability to repay credit is an entirely different question.

Zachary said...

Credit ratings say a lot about an individuals ability to make good decisions with their personal finances.

Anonymous said...



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