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Comment by sksk | Hacker News Reader

While your statement about payment promptness is correct, people with good scores tend to save more than others (scores do not use savings or income or wealth into account, however).

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.

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What about people with no debt? If you own your home and don’t carry any consumer debt then you look like a bad credit risk despite being one of the best risks.

It depends on what you mean by 'no debt'. If you mean, they have never ever had a loan then they will most likely not even have a score or a poor one (they will be categorized as a 'no hit' or 'thin file'). Don't have stats top of my head for this group but my hunch is no-hit / thin-file are people with poor access to credit and not many actively avoid debt altogether.

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.

I'd lived in the US for about five years before I bothered to get a credit rating. I remember when I was renting an apartment the agent looked shocked that I didn't have one.

"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!

It is amazing this isn’t it. Being rich enough to not need to borrow makes you a bad credit risk.

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?

Because not having a credit rating is the absence of information, not evidence of being rich/responsible enough to never need credit. You're an unknown quantity, it's impossible to establish what a default score should mean, except "we don't know you, so we're gonna err on the side of not lending you money". What you really want is to be able to record evidence of having bought a car with cash, of consistently saving etc with the credit rating system, but that doesn't exist.

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.

>> Why is a rich person with no debt and huge amount of assets more of a risk than an undischarged bankrupt?

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.

People without a credit score fall into three categories which really have nothing in common in regards risk. 1. The unbanked (i.e. very poor). 2. The very wealthy or the moderately wealthy with an aversion to debt. 3. Recent immigrants. While I suspect 2 is relatively small, both 1 and 3 are quite large pools. Treating all three as a greater risk than someone with a history of poor debt management seems perverse.

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.

Get a free credit card, put a little spend on it every month, and pay it down every month. Yes, it will take a little bit of discipline, but showing discipline is what having a good credit rating is all about.

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,

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