When it comes to financial matters, consumers tend to have a lot of confidence but a dearth of knowledge. Intensive and often costly interventions intended to close this gap haven’t helped much, but research by New York University’s Tatiana Homonoff, University of Wisconsin-Madison’s Rourke O’Brien, and Chicago Booth’s Abigail Sussman suggests that a simple email may prove an effective mechanism for helping consumers up their financial game.
More than 400,000 customers of Sallie Mae, a private college-loan lender and servicer, were included in a study that tracked whether a quarterly email letting them know how to view their FICO score for free on Sallie Mae’s website might lead to better financial habits.
The FICO score is the ubiquitous financial report card businesses use to size up the creditworthiness of consumers. Since 2013, the FICO Score Open Access initiative has made scores available to consumers for free, through partnerships with banks, credit-card issuers, and other financial institutions that buy FICO credit scores. As of early 2018, more than 250 million consumer accounts have been offered free FICO scores, which can be accessed by logging in via the provider’s website.
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Do Banks Give Credit Where Credit’s Needed?Homonoff, O’Brien, and Sussman find that Sallie Mae borrowers who received a quarterly email “nudge” were 65 percent more likely to log in to the website and view their FICO scores than customers who did not get the inbox prompt. Moreover, during the two-year study period that ended last June, participants who received the messages saw their FICO scores rise and were less likely to be delinquent in paying their bills.
The emailed contingent also opened more credit-card accounts. Though it may seem counterintuitive, this can be positive, as FICO algorithms weigh the number of accounts held by a consumer. While having too many accounts can be detrimental to some consumers, the researchers point out that the relatively young average age of study participants (25 years) means that it is possible they would benefit from having more accounts, as it would help build their credit score.
The researchers sorted Sallie Mae student-loan borrowers into four groups. The first was a control group made up of 10 percent of borrowers, who did not receive an email nudge, though they could continue to access their FICO score for free on the Sallie Mae website.
The efficacy of the emails seems to stem from combatting overoptimism.
The remaining customers received one of three quarterly emailed messages. One group was merely told via email that the quarterly update to their score was available. A second group received an additional message explaining how FICO scores affect one’s finances. A final group saw a keeping-up-with-the-Joneses-type exhortation that people just like them were taking steps to manage their financial future. Due to privacy issues, individual FICO scores were not included in emails; participants had to sign in to their Sallie Mae account to get their score.
Nearly a third of Sallie Mae customers who received any of the three email messages in the first year of the study checked their score at least once, compared to just one in five in the control group. There was no difference across the various email message groups.
The nudge also seems to have some beneficial consequences, measured one year after the intervention began. Among participants who received an email reminder, the rate of being at least 30 days late on bill payments was 4 percent lower than in the control group. When the researchers looked at the same variable among emailed participants who were induced to check their score as a result of the intervention, the incidence of late payments was 9 percentage points lower than among participants who did not receive emails. The average FICO score was 8 points higher for the emailed cohort. The researchers write that “it does appear that viewing one’s FICO Score drives financial behaviors which, on net, improve the creditworthiness of individuals.”
The efficacy of the emails seems to stem from combatting overoptimism. In a separate survey that included 3,500 Sallie Mae customers, individuals were asked to self-report their FICO scores. The researchers compared these estimates with actual scores, and the accuracy was 14 percent higher for people who received the email nudge than for those in the control group. Specifically, emailed participants were less likely to overestimate their score.
Tatiana Homonoff, Rourke O’Brien, and Abigail Sussman, “Does Knowing Your FICO Score Change Financial Behavior? Evidence from a Field Experiment with Student Loan Borrowers,” Working paper, February 2018.
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