Are you impatient?
If so, it could hurt your credit score.
Still reading? Good, because it turns out Mom was right: Patience is a virtue -- at least where your credit score is concerned.
An unpublished study from the Federal Reserve's Research Center for Behavioral Economics and Decisionmaking in Boston entitled, "Time Discounting Predicts Creditworthiness," found that impatient folks are more likely to blow off their credit card bills or default on their mortgage.
"There was very little empirical evidence that can link those two directly together and we did show that there is this association between how people think about the future -- how impatient they are -- and their credit decisions," says Stephan Meier, an associate professor at Columbia University's business school, who co-authored the study with Charles Sprenger, associate professor of economics at Stanford University. Their study will appear in the January issue of Psychological Science.
Meier and Sprenger were working as economists at the center at the time, trying to identify psychological reasons why consumers might default on their mortgage. Their hypothesis was that those who "discount" time by favoring immediate gratification over delayed gratification might prove greater credit risks to credit card issuers and mortgage lenders.
"If you default on your loan, you have a little bit more money available right now but the potential costs come in the future when your credit score gets hurt and affects the price of your loan or whether you get a job or not," Meier explains. "So how people think about the future is probably very important,"
But how to test it?
The marshmallow test For inspiration, they reached back to psychologist Walter Mischel's classic "marshmallow experiments" from the late '60s.
"You place a marshmallow in front of a 5-year-old kid and you say, 'I have to step out of the room. I'll come back in 10 minutes and if you haven't eaten that marshmallow, I'll give you two,'" says Meier. "They have to think, is it worth it to eat that one now or should I wait?"
Follow-up studies with Mischel's test group found that the preschoolers who were patient and delayed gratification fared better in school, work and life than those who gobbled the marshmallow posthaste.
Instead of preschoolers, the Fed duo placed their marshmallow-inspired questionnaire before 437 low-to-moderate-income Bostonians seeking credit and counseling help at one of the Fed-run community centers. The participants agreed to share their credit scores, tax income, education and other information that enabled the researchers to control for those factors.
"The test we did was basically a marshmallow test for adults," says Meier. "We told them, 'Look, you can get a little bit less money now or a little bit more money in a month.' We would start at, 'You can have $49 now, $50 in a month.' They would take the $49 now. 'So OK, what about $47 now, $50 in a month?' Then $40, so on and so on until we got to $20 now or $50 in a month. Then most people said, 'No, for 30 extra dollars, I'll wait a month.'"
Not only did the study show a direct correlation between impatience and poor credit scores, but the less patient an individual's behavior, the lower their credit score.
"You could think, well, that's just because they have less income," says Meier. "But even if you control for their income, education and a couple other variables, that correlation holds."
Credit card implications Meier says the findings have clear implications for credit card companies, especially the growing number that are using data mining to trim their customer risk.
"Maybe if you're a credit card company, you might look for signs that people are impatient or not. You could potentially put that into your risk models to help prevent people's defaults," he says.
"There are things that a customer buys that are a little bit more present-mode than future-mode. For instance, they may buy environmentally friendly light bulbs that are a little bit more expensive now but are going to save money in the future. Those guys are probably less likely to default, given our study."
In a working paper, Meier also has linked credit scores to mathematical ability. "In summary, people who can't divide 300 by 2 are more likely to default on their mortgage," he says. "We're going to try to combine the two findings into a broader study on mortgages."
What does it all mean for consumers (and thank you for your patience)?
Meier says just recognizing your own risk factors can be a start.
"If you reflect and realize that you're always very impatient, I could see where there are strategies that could help overcome that," he says. "You may have friends or peers who could help you, or step back and think twice about a purchase and not act in the heat of the moment. In saving, if your impatience always gets in the way, there are probably ways, such as automatic savings, where you don't have to make the decision all the time. If you're aware that you're impatient, there are strategies to overcome that."
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