A recent study has shown that the early environment in which you grow up leaves a profound imprint on your credit record. This study, involving 25 million individuals, found that the childhood environment and the people around you can have a significant impact on a person’s financial behavior and habits.
On Wednesday, July 16, the “Opportunity Insights” research institute under Harvard University released a research report titled “Credit Access in the United States.” This report, a collaboration between the research institute and researchers from the United States Census Bureau, analyzed anonymous census, tax, and credit data of over 25 million people. The results revealed that even if individuals from similar economic backgrounds in childhood, the differences in their credit scores as adults could be significant based on the region in which they grew up. For example, impoverished children in Baltimore, Maryland, tended to have lower credit scores as adults compared to impoverished children in the neighboring Montgomery County.
Researchers compared children from low-income families, tracking their credit status as adults. Even with similar incomes as adults, those who grew up in relatively affluent areas tended to have higher credit scores and were more likely to make timely repayments. This suggests that factors influencing credit extend beyond income to include geographic location.
The study emphasizes that childhood experiences deeply shape individuals’ attitudes and behaviors towards finance. This finding is consistent with previous research from “Opportunity Insights” that suggests a person’s economic achievement is closely tied to the community they grew up in.
According to the research, a low-income child who grows up to have a higher credit score is likely to have grown up in a community where there is more interaction between the rich and the poor. This implies that besides parental influence, the parents of a child’s friends may also play a crucial role in shaping their financial concepts.
Based on the study, whites born between 1978 and 1985 from lower-income families and raised in Montgomery County, Maryland, had an average credit score of 695 in 2020, classified as “prime.” In contrast, those raised in Baltimore had an average score of 640, falling into the “nonprime” or “near-prime” category, making it harder to obtain loans with higher interest rates.
Looking across the United States, the study also found similar regional disparities. For instance, whites from low-income families growing up in the central northern regions tended to have higher credit scores compared to those in the Appalachian region or certain southern areas.
The study also highlighted the impact of moving from areas with low repayment rates to areas with higher rates at a young age on an individual’s credit score in adulthood. A person’s credit score determines their economic future, affecting their ability to buy a car, a home, or start a business.
The study indicates that differences in credit scores do not solely reflect that individuals from certain areas earn more money as adults. For example, “If you take two individuals earning $40,000 a year, one raised in Tampa and the other in Minnesota. The individual from Minnesota is less likely to default on a loan,” said Nathaniel Hendren, an economist at MIT and co-founder of “Opportunity Insights.”
Research suggests that this disparity may be linked to local history. In certain regions, the poor had earlier access to banks and financial knowledge, learning how to use credit tools properly and passing down these concepts through generations.
The study also underscored racial disparities. With similar childhood economic backgrounds, the credit scores of African Americans as adults were significantly lower than those of whites.
For individuals born between 1978 and 1985 from lower-income families, African Americans had an average credit score 69 points lower than whites. In the past, many African American communities struggled to access mainstream financial services, turning to higher-interest private loan institutions. In the study, African American respondents were more likely to mention using alternative credit tools like payday loans and pawnshops.
Researchers acknowledge that there are still many unknown factors, and further on-site investigations are required to gain a deeper understanding of the true reasons for the impact on credit scores, whether it’s community networks, economic history, or other factors.
One thing that is certain is that credit can be a double-edged sword, leading individuals into debt or serving as a ladder for upward mobility. The ultimate goal of the research is to find ways for impoverished children in areas like Baltimore to gain the same credit knowledge as children in Montgomery County.
Hendren mentioned, “If we can design proper interventions, perhaps more people can benefit from the positive aspects of the credit market.”