Credit Scores and Committed Relationships
brookings.edu
brookings.edu
I think their trustworthiness hypothesis is probably weaker than other parts of their analysis. I have my own hypothesis based on my experience working in this industry: Staying in a committed relationship may not be really about 'responsible' behavior but could be due to similarity of financial management styles. Most marriage counselors talk about 'sorting out your finances' before getting married; credit scores are essentially capturing that issue -- people who have very good credit scores tend to be savers (although credit scores do not use income or wealth into account) and ones who have poor scores tend to be financially poor and for the large part spend more than they can afford. Also people with good scores tend to be manage finances in a particular way -- pay bills early, monitor balances regularly, etc. -- while the ones with poor credit scores do not usually pay much attention to finances and miss payments frequently.
When you have two people with two different styles of managing money, it can lead to a strained relationship and subsequently lead to separation.
My anecdotal experience is spendthrifts have a lot of relationship problems that are not helped by being with another spendthrift.
At our startup we get depersonalized credit data but we don't have a nice panel like the Fed :) so cannot really do that analysis on our end. I would be nice if they released this data publicly -- once it is setup for modeling (with just a few variables), it is so hard to re-identify so the risk of privacy invasion is low. I doubt that will happen though.
I am unfortunately a believer. I've always wanted to disregard the whole silly, archaic system, but I can't. I'm very 'responsible' by nurture. My spouse is also a believer. We have a very stable relationship, we're very responsible, trustable, and, of course, have perfect credit scores all because of our silly beliefs.
I'm not sure what you mean by 'believe' but it makes it sound like there aren't obvious, objective benefits to paying bills and having a good credit score. I don't like the system either, but it results in me not having to pay higher interest rates on loans, not having to put down large deposits for rent, getting to purchase things on credit, etc.
From an economic perspective this looks like time preference. Individuals who place a greater value on enjoyment in the present compared to enjoyment at some time in future are less likely to save money for the future, preferring to enjoy it now, and are also less likely to persist through the difficult parts of a relationship in pursuit of some future benefit from having a lasting relationship. I prefer the economic perspective as it's more impartial, and doesn't make the assumption that lack of "relationship skill" is the cause of relationship failure.
It's still the case in the US though that someone who saves will do a better job of payment reliability than someone who borrows the same amount of money but doesn't save, as the former will always have savings on hand with which to make repayments, while the latter may not.
We do have credit scores here now, but I have never bother to look into mine (I don’t have any debt other than a credit card which I pay off each month). I think our banks are a bit more holistic when it comes to debt issuing than US banks which seem to be fixated on credit scores.
On the topic of credit scores they are a huge pain if you move to the USA. I remember having a huge problem buying almost everything that required monthly payments (phone, cable, rent, etc) because I did not have a credit score. If someone wants a good business idea start a credit rating agency that is able to rate US immigrants and gives them rational credit scores based on their previous credit history in their country of origin.
Credit scores only penalize you when you don't have any credit but most of these good score folks tend to have (or had) a mortgage or have had auto loans, etc. Just because they are not actively opening new accounts does not mean they will be penalized -- credit scores look at pretty much everything in your report and they get credit for their historical good behavior.
Another thing to consider is that good credit scores leads to a positive cycle: you don't pay high interest rates on your loans and the extra money saved here allows you to pay down obligations faster, which in turn allows you to save more in the long run.
If you mean, they had debt but they paid it all off, then they will still get a lot of credit for it. Credit scores look at your 'oldest tradeline' and maintaining good credit over many years is viewed favorably. Their scores will not be as high as someone who had recent credit transaction and managing it well (all else being equal), however, it will still be very good. If you look at the FICO Score, anything above a 760 or 780 is usually just bragging rights -- it hardly changes your rates on mortgages or loans.
"How can you not have a credit rating? Don't you have a car? Or a phone?"
I said "Uh yeah, I paid cash for my car, and my phone is prepaid".
I had a helluva time convincing him that someone who never has to borrow money (and can buy brand new cars for cash) is a better credit risk than someone who borrows money all the freaking time.
Eventually I gave in and got a credit card for the sake of miles. Sheesh!
We seem to have some very knowledgable people here so why is it that credit scores don’t start at a default value and go up or down based on your credit history. Why is a rich person with no debt and huge amount of assets more of a risk than an undischarged bankrupt?
The system optimises for what it (probably correctly) perceives as covering the large majority of situations. Sure, sometimes that leads to some curious corner case situations but it's hard an indictment of the system.
Good point and as mseebach points out absence of information is a signal and these type of no-debt cases are very rare that is hard to build a model around.
At our start-up SimplyCredit, we look at things holistically, not just your credit score and that should help with your concern. However, it is harder to do this effectively without proper data at scale. I wish the govt. made different types of data about the borrower available to lenders (with permission from the borrower of course) -- for example, it will be nice to know electronically someone paid for mortgage outright or their income statements, etc. Right now people attempting to use this information have to resort to approaches that Mint uses (scraping, partnership with banks to not block them, etc.).
That said, credit scores actually work in a manner similar to what you suggest. Credit scores are 'centered' around a value and good things get you +score1 and bad things get you -score2, bad things you didn't do +score3, etc. It is not exactly what you suggest as no-hits don't automatically get neutral rating -- most case those apps will get rejected.
The risk profile of a recent legal immigrant with a PhD and a high paying job is very different to someone that has never had a bank account and who has worked for cash in hand. Why treat them the same? At the very least let someone with no history of credit establish a credit score baseline based on their international history, current income, and assets.
You won't pay any interest or fees, and it will go a long way to establish a positive credit record which will come in handy if you will need real credit down the line. Even if you think you won't, having options is always better than not having them,
In Austria, credit bureaus like in America are seen as corrupt and criminal. China also doesn't have a central credit bureau.
I feel bad for every american when I hear intelligent people muse about making it more complex. You are just increasing the ability of companies to walk on the poor. This creates a bad bottom end of society, which America suffers from and Austria does not.
America has crumbling cities like Detroit, and it's because of the criminal thieving credit bureau, but here in this thread we have lots of people talking about the credit bureau without even taking civilization into account.
This isn't civilized behavior and it should not be tolerated in the USA.
Investigate the people who feel they have been abused by the credit bureau, the evidence will be everywhere. It is only obvious.
It's also worth noting that it is in the interest of those with a high credit score to defend the system even though it enables criminal behavior towards the poor. Shame.
An activist could conduct an investigation and prove the same if that's what the American system requires. I have no doubt that American companies are victimizing millions of people because of their poverty. American people and American society will continue to suffer. Shame.
If companies are overcharging people, how does this make the credit bureau corrupt or thieving?