Should Defaults be Forgotten? Evidence from Legally Mandated Removal

Swedish law mandates the removal of negative credit arrears from credit reports after 3 years. We use a sharp discintunuity approach and \u85nd that the removal induces an abrupt improvement in the individualscredit score that is not reversed in the longer run. Further, the excess loan applications caused by the boost in creditworthiness translates into signi\u85cant new credit access. We nd evidence that only a minority of the individuals who received a negative credit arrear may be inherently high risk. Alternatively, our results may be interpreted as suggesting that removal of credit arrear may induce borrowers to exert greater e¤ort along the lines of Vercammen (1995) and Elul and Gottardi (2007). Either interpretation opens the possibility that credit arrear removal is welfare enhancing