Buying fresh milk and vegetables, maintaining a consistent shopping schedule, and taking advantage of sales are linked to good creditworthiness, while purchasing cigarettes, energy drinks, ready-made food, and shopping irregularly are associated with lower creditworthiness.
A new research paper has found that people’s grocery shopping behavior can reveal a lot about their creditworthiness, giving banks and lenders a new way to evaluate potential borrowers.
Recent advances in data analysis have opened up new ways to assess creditworthiness beyond traditional metrics like credit scores and income.
A new preprint paper authored by Jung Youn Lee, Joonhyuk Yang, and Eric T. Anderson (of Rice University, the University of Notre Dame, and Northwestern University respectively) explores how grocery shopping data can be used to evaluate consumers’ credit risk.
The researchers discovered that certain grocery shopping behaviors can be strong indicators of a person’s ability to manage credit responsibly.
The paper, which has not yet been peer-reviewed, was made available on March 12, 2024.
Study Participants and Methodology
The study is based on data from a multinational company that operates both a credit card issuer and a supermarket chain in a developing country in Asia.
The data covers 30,089 consumers who made grocery purchases using supermarket loyalty cards and also had credit cards issued by the company.
The period of analysis spans from January 2017 to June 2019.
Participants varied widely in age, gender, and income levels.
The data set includes information such as monthly income, employment status, occupation, and number of dependents.
Approximately 50% of the consumers did not have credit scores, highlighting a significant portion of unbanked or underbanked individuals.
This diverse sample provides a robust basis for analyzing the relationship between grocery shopping behaviors and credit risk.
Healthier Food Choices Linked to Responsible Credit Management
The study found a strong link between the types of groceries people buy and their creditworthiness.
People who buy healthier and less convenient foods, such as fresh milk, yogurt, fruits, and vegetables, are more likely to pay their credit card bills on time.
On the other hand, people who frequently buy cigarettes and energy drinks are more likely to miss payments.
These purchasing decisions suggest a level of planning and self-control that is essential for managing credit responsibly.
Consistent Shopping Habits Indicate Better Financial Behavior
One of the key findings of the study is that people with lower “trip entropy” — that is, those who shop consistently on the same day every week and/or at the same time of day — are less likely to be late payers or defaulters, and are less likely to miss payments on their credit cards.
A standard deviation increase in trip entropy is associated with a 10.5% increase in the probability of missing payments (over a base probability of 12%) and a 10% increase in the probability of being a defaulter (over a base probability of 7%).
Regularity in shopping reflects a stable routine, which translates to more reliable financial behavior.
Consistent Spending Predicts Better Credit Behavior
Another important aspect the study examined is how consistently people spend on groceries.
People who spend similar amounts on groceries each month tend to manage their credit better.
The study found that people who keep their grocery spending consistent are more likely to pay their credit card bills on time.
Regular spending habits suggest disciplined budgeting, which is crucial for maintaining good credit.
Conversely, irregular spending patterns are linked to higher credit risk, reflecting potential financial instability.
Variety in Shopping Choices and Credit Risk
The study also looked at how often people switch the types of products and brands they buy.
Those who frequently change the products and brands they purchase are more likely to miss payments or default on their credit cards.
In contrast, people who stick to the same brands and products tend to have better creditworthiness.
This finding implies that brand loyalty might indicate a broader tendency toward stability and predictability in financial habits.
Strategic Shopping and Promotions Indicate Better Financial Management
Shoppers who take advantage of promotions and sales are often better at managing their credit.
The study found that people who frequently buy items on sale are about 8% more likely to pay their credit card bills on time.
This behavior suggests that these consumers are price-sensitive and budget-conscious, qualities that contribute to responsible credit management.
Implications for Financial Institutions
The findings of this study suggest that grocery shopping data can be a valuable tool for predicting credit risk, especially for people who lack traditional credit scores.
By analyzing these behaviors, financial institutions can gain insights into a consumer’s financial habits and make more informed lending decisions.
This approach could help extend credit to those who are traditionally underserved, promoting greater financial inclusion.
The researchers conclude that while grocery data can significantly enhance credit risk predictions, its incremental value diminishes as traditional credit scores and financial history become available.
Therefore, grocery data should be used as a complementary tool rather than a replacement for traditional credit assessment methods.
“Individuals who consistently demonstrate ‘good’ behaviors in the grocery domain,” the authors conclude, “are more likely to manifest ‘good’ behaviors in financial domains.”
Study Details
- Title: “Using Grocery Data for Credit Decisions“
- Authors: Jung Youn Lee, Joonhyuk Yang, Eric T. Anderson
- Publication Date: March 10, 2024