Does Financial Access Mitigate the Effects of Income Volatility on Credit Record?

Background and Purpose

Financial access holds the promise of providing resources for maintaining financial well-being during times of negative income volatility and financial stress. While some studies have found assets, including financial access, to be important buffers against lack of financial well-being during periods of income volatility (Friedline & Freeman, 2016; Guo, 2011; Lim, Livermore, & Davis, 2010; Mills & Amick, 2010), none specifically used a combination of measures for financial access, including checking, savings, retirement, mortgage, and investment accounts, and number of credit cards. Using a more comprehensive measure of financial access may provide a broader picture of the role of financial access in periods of income volatility. The purpose of this study is to add to the literature about the usefulness of financial access to mitigate the effects of economic hardship. The study has two research questions: (1) Is there an association between intrayear negative income volatility and self-assessed credit report status? and (2) Does financial access mediate the effects of intrayear negative income volatility on self-assessed credit report status?

Methods

Using the 2015 National Financial Capability Study (NFCS) of American adults from the general population (n=27,564), this study examines the association between financial access, income volatility and credit report status. The dependent variable measuring financial stress is self-assessed credit record status, the primary independent variable is negative income volatility, and financial access is a mediator. Confirmatory Factor Analysis is used to create a latent variable for financial access, using bank account, credit card, retirement savings, investments, and mortgage as indicators.  Structural Equation Modeling is used to test for the possible meditational effect of financial access for income volatility and credit record.

Results

Results of this study indicate that income volatility has a direct negative effect on credit record status (β= -0.139, p<0.05), which suggests that a significant drop in income causes financial strain in households, which affects households’ ability to provide on-time payment for payment obligations. Financial access positively impacts credit record (β= 0.855, p<0.001), so that consumers use of bank accounts, credit cards, and other financial products and services positively impacts their credit record. However, income volatility does not impact financial access, so that as households’ income drops, their use of bank accounts, credit, and other products and services is not impacted.

Implications and Conclusion

Results suggest that the extent to which households have financial access while experiencing income volatility does not affect their experience of financial hardship, as evidenced by their credit record status. With negative income volatility, financial access does not provide mediation effect between income volatility and credit record status, and thus does not appear to buffer against financial hardship for households experiencing intrayear income drops. This moderating relationship may not be present due to the challenges for some households to use existing products and services from formal financial institutions. Households may need changes to bank accounts and other financial access indicators to fully realize the potential mitigation effect during financial crises.