August 14, 2015

Do Payment Text Reminders Help People Improve their Credit?

Yes, but only for people with low credit scores, according to a new working paper from the Boston Federal Reserve.  After conducting a field experiment during the 2013 tax season on approximately 1,000 low- to middle-income tax payers, the study’s authors found that monthly text reminders:
  • improved credit scores by 23-24 points for people who began with low scores (below 584),
  • had no effect on those with scores between 584 and 671, and
  • decreased credit scores by 17 to 18 points for people with high scores above 672.
For people with low scores, the authors found that the text reminders helped reduce their debt and improve their payment patterns.  Those in the middles level had improved payment patterns but no effect on their credit scores, possibly because it takes longer for a positive payment pattern to affect a score than a negative one.  For people with high credit scores, the authors state that the reminders may have led them to slacken their financial self-discipline.
Click here to read the full paper.