Financial well-being and credit behavior in Mexico

Abstract

Purpose This study analyzes the relationship between credit score, credit behavior and financial well-being among consumers in Mexico. Credit behavior includes payment history, credit history length, debt amount, credit mix and new credit applications.

Design/methodology/approach We compare OLS regression, regularized regression and ensemble methods to analyze credit behavior variables influencing financial well-being.

Findings Our results confirm that consumers whose credit behavior complies with financial institutions’ standards tend to show better financial well-being. Higher credit scores, higher incomes, having multiple income sources and using more extended payment periods are associated with better financial well-being. Conversely, spending close to credit limits and having a credit history of 2–5 years are related to lower financial well-being.

Research limitations/implications The data are nationally representative; however, they do not allow for intra-national analysis that captures the socioeconomic and cultural diversity of an emerging economy. Also, we acknowledge that the sample is skewed toward men.

Practical implications Financial institutions can benefit by refining their credit evaluation processes and developing more effective credit products, especially in emerging markets. Moreover, policymakers can benefit by designing more targeted strategies to promote responsible credit usage.

Originality/value We confirmed that the credit behavior variables in the FICO model are relevant to estimating financial well-being in an emerging economy, but not all of them. The FICO model to calculate credit scores, initially designed for developed economies, should be revised when applied to emerging economies. This study offers valuable insights for improving credit evaluation practices in emerging economies.