The whole credit reporting system is a money making racket and there is zero interest in keeping the information in it accurate. No one is held responsible for mistakes and the suffering people go thought because of it.
Credit reporting system works pretty well and it is evident by the fact that we have seen mortgage bubble burst (where government forced banks to ignore credit ratings) and student loan bubble building up (ditto as housing loans).
The marginal gain in making it more accurate is not very much so I am pretty sure banks will not put efforts in that direction. Also, banks don't care if 1 in 10000 get screwed up because of their mistake because there is plenty of more fish in the pond. But that is how the world works.
The credit rating idea was born out of the Southern morality culture. "Are they good people? Let's put a number on it and sell it!"
The flip side of that is that they can't possibly be wrong unless you prove it, and even then, they're so butt hurt that you called them out on it that they'll take their time fixing it, if ever. The idea is that they're right, you're wrong, and they have powerful friends who protect them from being sued for slander.
Citation needed.
> (where government forced banks to ignore credit ratings)
This is simply not true. The mortgage bubble burst when big investment and gambling/speculation institutions could no longer cover the shorts against mortgage bond derivatives and the incentive for packaging questionable mortgages into the underlyings disappeared. These mortgages weren't all (or even mostly) to poor people with no ability to pay, and the government didn't force anybody to do anything.
These same banks paid ratings agencies to ignore the bad mortgages in these securities specifically so they could increase the volume of mortgage bond sales. So your example is actually one that shows that ratings agencies' products are not necessarily accurate (some might call them fraudulent, even).
> where government forced banks to ignore credit ratings
I was under the impression that subprime was keenly aware of credit ratings, subprime is defined as failure to meet the Fannie May and Freddie Mac standards. The CRA excluded race and gender as loan criteria, leaving credit rating as the goto.
There's lots about banks like countrywide ignoring credit rating, but i can't find anything where the government required ignoring the credit rating. Could you help me out with a link?
As one example that has affected me, I moved to the US a year ago. Go to buy a used car last month with bank statements showing a good salary and enough cash to buy the vehicle outright, a check for 1/3 of the car price, and phone numbers of my employer and landlord. All the banks the finance department contacted automatically denied me without looking at the stuff I brought.
I went to my local bank branch thinking a human might help. I got automatically denied, the manager tried to escalate given the information I provided, but I was still denied.
In the end my loan was through the car manufacturer at a fairly high rate.
I realize I am fortunate in that I can afford to take a crappy loan solely to build a credit history and play this silly game. But the way the model is used treats people who are new to obtaining US credit and people who have used credit terribly virtually identically.
Anyway, I had a similar issue with car loans when moving to the US. I've since realized that it's pretty trivial to increase your credit score if you pay a small amount of attention to it. Simply sign up for credit karma, get a few no annul fee credit cards, and put a small purchase on them every few months so that they don't get closed due to inactivity. Within 12 months your credit score will be stellar.
But then, after 3-4 years, it's pretty damn convenient not needing to mess around with lengthy applications for credit (except for possibly on a mortgage), and having a credit reputation that's completely portable across providers.
It pretty much makes sense that newly arrived residents are a corner case that isn't worth worrying about too much for the banks and credit reporting agencies - at any given time, the number of residents who have been here for less than, say, 2 years is going to be a pretty small, somewhat risky part of the market (less assets in the country, more likely to leave).
The banks do pay for it - they have to pay a fee do get your credit report.
They have a clear incentive to not underestimate prospective borrowers' credit risk (or they'll lose more in defaults than they gain in interest), but the only incentive to not overestimate someone's credit risk is that someone else might offer a loan on better terms. Even if they are aware of flaws in their assessment process that overestimate a borrower's risk, they probably feel safe in the knowledge that everyone else is using that same process and will overestimate risk in the same way. A more accurate credit assessor could profit from this situation ("get your credit reports from us, and you can undercut lenders who rely on the big three"), but the barrier to entry is rather high.
It is disturbing how the entire economic system is set up to make life harder on those it's hardest on. Poor, in debt, barely making ends meet? You're lucky if you can get a credit card for under 30% APR. Mortgage rates historically low? Not for you. Need a loan? Sucks to be you.
Finally clawed your way out of debt, trying to get ahead? Tough shit, your credit report will haunt you for the better part of a decade.
What about that doesn't make sense? The person you described carries an incredibly high default risk.
If credit scores are unfair to the poor, it's because they don't provide accessible way to fix errors. If your credit score is low because you're in excessive debt and unlikely to pay it off, then the credit scoring system is doing its job.
The point is, we help those that don't need help, and hurt those that are already hurting. We give better rates to people with high credit scores, but people with low ones probably need it more. It can turn into a feedback loop where the only way out is some form of outside help.
Beyond that, credit cards can adjust the APR on existing balances.
When we ignored the basic laws of economics we had a mortgage crisis and thousands of people lost their savings and jobs.
There is plenty of outrage over that and all sorts of other things, just not enough to change the way things are. Too many interests, too-many individuals with their entire lives and mindsets invested in the way things work at the moment. As someone that advocates less state-involvement at all levels, I find it incredibly frustrating to watch day to day things unfolding. Every single facet of our lives is affected and skewed by the state in one way or another. Sometimes in a good, and sometimes in a bad way.
No they don't. Loans are insured against default. Interest rates more than cover extremely low default rates and then some.
https://en.wikipedia.org/wiki/Collateral_protection_insuranc...
http://www.investopedia.com/articles/investing/022416/why-ba...
https://en.wikipedia.org/wiki/Emergency_Economic_Stabilizati...
Clearly you spend more time attempting to belittle than understand the conversation.