Born to be (sub)Prime: An Exploratory Analysis

We study how inheriting parents’ credit histories affects credit scores and access to credit of young individuals entering the credit market, and their subsequent experiences in the credit market. First, having an inherited credit history significantly positively affects credit scores at entry. Second, initial credit scores are very persistent. Third, inherited credit histories only affect outcomes through the initial credit score distribution. Finally, initial credit scores have significant persistent effects on credit use and access, such as having a mortgage or credit card penetration and utilization rate. Our results point to the importance of initial conditions in credit markets and are consistent with mechanisms based on multiplicity of equilibria and self-fulfilling liquidity traps in which lack of access to credit due to low credit scores re-affirms the low credit score ranking of an individual.