To analyze and address issues related to (unequal) access to credit, we need to understand how new borrowers, who have yet to build a credit history, nonetheless gain and expand their access to credit. In this article, we show how lenders seem to respond to the granting of credit to a new borrower before the borrower establishes any pattern of repayment. When we model this information-aggregation mechanism, we find that the model prediction is borne out in the data. Our model thus highlights the importance (and the favorable side) of borrowing from multiple lenders, at least for new borrowers. This is in contrast to the way this is normally viewed in the literature — as simply debt dilution.

This article appeared in the First Quarter 2022 issue of Economic Insights. Download and read the full issue.