I know for the businesses, it makes perfect sense to have a credit system, it’s just that I appreciate it’s not a thing over here: people should incur as little debt as possible.
Getting a credit card and spending up to the limit while only making the minimum payments is bad debt. Buying a luxury car that's more expensive than you can really afford because the car dealer talked you into it is bad debt.
On the other hand, if you need a car to get to work, getting a car loan for a practical car is probably good debt. If you're married and about to have your second child and need a house, a mortgage is probably good debt because you're building equity, the house might appreciate, and anyway the alternative is throwing away a similar amount on rent.
Point being, it is probably not best to always seek to minimize debt. There are trade-offs to consider. Often, avoiding debt is better, but sometimes the negatives of debt are more than outweighed by some opportunity it unlocks.
So is it bad for society? It depends on how much bad debt it encourages and how much good debt it encourages.
Building credit means you could put yourself thousands of dollars in debt... but you don't. 90% of building credit is demonstrating restraint NOT to use credit dangled in front of you. In the rare instance where you take advantage of the ability to use more credit than usual, you pay it off within a reasonable amount of time. The credit industry is predatory, to be sure. But that's only for the idiots who believe they're "able to" or "expected to" use all the credit afforded to them. It's about seeing all that possible "green" in front of you and NOT using it, or using it sparingly and responsibly.
>> Some of us would prefer not to utilize debt at all
So don't. Build your credit by buying groceries on a credit card, and paying it off every month. You're not really going into debt; you're just postponing paying your groceries by a week or two. You can build a near-perfect credit score without ever paying a single cent of interest.
No, I'm saying I don't want to have anything to "pay back" to anyone. _You_ are free to live differently, I just want the option to complete my transaction at the time and move on. Yes, paying back debts on time prevents bad outcomes, but so does not taking on the debt in the first place. And objectively it's a much more rock solid way of making sure your finances don't get out of whack. I've never met anyone who says "I'm bad with debt," but yet many American's have suffered bad consequences from debt.
> you funnel/proxy money you already have through a creditor
A service I don't want, get no value from, and increases the cost of the goods I consume because they aren't offering it for free.
> Building credit means you could put yourself thousands of dollars in debt... but you don't.
Not quite, you could actually be carrying debt you aren't able to pay back, but are able to make payments on. In fact - it's in the credit industry's best interest for you take out lots of loans that you _can't pay back_ but _can_ make payments on because the (often massive) interest is the money maker. Soon you'll have paid more in payments than you were actually lent. This has gotten so bad the government has had to get involved multiple times. I'm worried that credit scores are tools to create that situation, because of this alignment (think it about like this - are you the customer/priority? or is it the lenders?). Sort of like casinos wanting you to think you're "up" or close to a big score when in reality you're in the red. (And don't get me started on the opaqueness of the systems, lack of recourse for errors, and oh yeah - the security negligence that leads to large scale losses of sensitive data...)
> "You're not _really_ going into debt;"
Aw come on, if you have to put "really" in italics you already know I'm not gonna buy it. :-)
I get that I can have a good credit score, I get that lots of people don't mind having one. To each their own. I'm just annoyed that I can't opt out. That "not having a credit score" is increasingly not a choice I can make, nor can my children.
A credit check serves as a proxy for someone who cares about their future reputation and hence is less likely to cause damage to an apartment, and if they do, then they will pay for it. Similar reasoning applies to other rental businesses such as hotels, cars, tools, equipment, etc.
Well to be fair, offering the full term rent up front to avoid a credit check seems sketchy as hell. Did you still let him do a credit check? He could have use this to verify your identity. I know a virtual bank in Canada that use them for that (if you refuse, they simply ask you to go do an identity check in a Canada Post).
Live nowhere?
Because if you won't pass the credit check for one property agency, you won't pass for any of them.
I've been in that situation. I had to pay 14 months rent up front. Crazy thing is I had the money and could pay it fine, but I couldn't pass a credit check to pay exactly the same amount monthly.
Actually the crazier thing is they required 12 months rent up front again, for the second year. You'd think by then I'd have a track record of paying rent.
All because paying rent for many years does not count towards credit rating, even though it's highly regular and the single largest outgoing for most people. (Paying mortgage does count. Annoying.)
Sure I agree that paying rent should count towards credit rating, but that's not an argument against credit rating.
A bad credit rating means that it's a bad idea giving you a unsecured loan... that's all. An apartment is sadly pretty close to a loan, even more so with all the renter protection you get out of it.
Paying the full rent in theses cases make sense then.
My point is that in the lostphilosopher case, it was maybe simply used as an identity check, making sure it wasn't from a criminal. The resulting credit score wouldn't matter because of the full rent.
> You'd think by then I'd have a track record of paying rent.
Well, if they feel safer that way, again make sense. Why won't you personally give me a loan? The same apply to that case.
A place to live is also a basic life necessity.
Something is very wrong in a society where a "bad credit rating", which can arise from many things (some of them having nothing to do with credit - agency malpractice comes to mind), threatens homelessness _even when you can afford to rent_.
Not really. Credit fosters growth. It's creating money out of thin air. It allows me to exchange rapid growth right now for interest payments later. If I'm young and want to buy a house, the time advantage of buying now versus buying when I have $100,000 saved in the bank far outweighs the fees and interest payments over time. Same goes for the utility value of a car or the ability to spend on a credit card for expenses incurred to go after a new career opportunity. So long as you have things planned out, credit is a very very good thing.
Yes, it makes sense to take on debt if you want to buy a house and you have a steady paycheck.
However, it's not obvious that it makes sense to take on debt to pay for things you already have money in the bank to afford. Why do I borrow $100 to buy groceries every week? I have more than $100 in my bank account at any given moment. Why do I borrow $3.50 to buy a coffee at Starbucks? I'm constantly borrowing money that I don't need, and then paying it back within a few weeks, just so that I can prove that I'm a responsible debtor.
This really becomes a problem when people use credit to pay for things they can't afford, of course. Still, the whole system of taking on debt for every minor purchase, just to prove that you'll pay it back, is sort of absurd.
I do it because I get a 1-3% rebate on all my purchases. That's free money for me.
Before I had a credit card that gave me a rebate, I bought everything with a debit card. I still had a credit card, but it was only for emergencies.
> Still, the whole system of taking on debt for every minor purchase, just to prove that you'll pay it back, is sort of absurd.
You don't really need to use the credit card to establish credit history. Simply having one is enough. A lot of people believe that to maximize the boost to your credit score, you shouldn't completely pay off the card, and instead carry a small balance every month, but that's a myth.
In your mind it's a 1-3% rebate, but in actuality you're paying for it anyway due to merchant fees, etc.
If we're going to question the overall system, then not having credit cards would likely mean savings for pretty much everything you would buy today that uses a credit card as a facilitation of payment.
Most US businesses don't bother with offering discounts for cash/debit payments, so it's not like cash-only lifestyle will generate dramatic savings.
If (a) everyone who owned a credit card actually had the means to pay for the good/service with available cash (even if not literally in their pocket) then (b) credit cards wouldn't be necessary and thus (c) good/services that typically use credit cards would be ~1-3% cheaper. In other words, the people who are getting rebates are artificially getting them b/c if credit cards didn't exist, all goods/services would be cheaper.
* someone needs to drive to the bank to ensure the register has enough pennies, quarters, and dollar bills to make proper change in the morning
* a system needs to be developed to prevent employees from stealing cash
* to avoid being a crime target, there needs to be a way to safely store larger amounts of cash
* there's a cost of an occasional fake bill being accepted by an employee
* someone needs to drive to the bank to deposit the day's earnings into the bank account
It's not like the US has zero businesses that deal exclusively in cash, so there should be success stories of disruptive startups going against the establishment by foregoing merchant fees and passing the savings on to consumers.
But outside of Arco am/pm gas station, I struggle to find a good example where a cash-only business, or chain, or a sector would offer consistently lower prices than their credit-card-accepting counterparts.
While it makes sense for the individual, high fees should be regulated.
I don't know if it's the same in the US, but in Canada, the price can't be affected by the way you pay for it. That push some places to refuse cards.
That means that customers who doesn't use credit cards, pay for my rewards too.
Having just disputed a merchant transaction last week, I have one reason - to introduce an additional layer of consumer protection at no additional cost to the consumer. If I had transacted in cash, I would've been screwed. And this was a major nationwide retail chain, not a dude in the alley peddling stuff that "fell off the truck".
Merchant fees are very high.
> If I had transacted in cash
The only difference with a debit card is a function of regulation and the network rather than actually being a credit or debit card.
But there were no discounts offered for paying cash.
This is exactly it. People who use credit to pay for things they can't afford are a risk, but how do you identify those people efficiently? Seems logical to test for that by starting with low credit limits rather than immediately offering loans for items of high value like a car or house.
The consumer gets a free 30-day loan and the issuing banks (via credit agencies) get valuable data.
However, although some will overspend, it's mostly a positive that home ownership isn't limited to the wealthy (and even the moderately wealthy may not have sufficient cash on hand in high CoL areas). Furthermore, even those young people with great jobs probably need to borrow for purchases like cars.
So I don't think people should overextend themselves but I don't have a problem with people using debt sensibly as a tool.
I think it's fine as long as it's always kept within reason.
If I have a disposable income of $500/month, and I want a $1,500 TV, I might just put that on the credit card. If I have a 20% APR on my card and pay it off in three months, I only pay a little over $50 in interest (Note for someone else that decides to check the math: Remember that many cards have a 30-day grace period on purchases before they start collecting interest). I might think it's worth it to pay an extra $50 to get that $1,500 TV now rather than 3 months from now. Maybe it's actually a $2,500 TV and it's on sale for this week only. Better yet, maybe the store is offering 0% financing for 12/18/x months, which is far longer than it'll take me to pay it off anyways.
Of course, the "within reason" part is what kills people. If my disposable income is under $100/month, then purchasing a $1,500 TV on credit is probably a bad idea. Heck, even saving for a $1,500 TV is probably a bad idea.
Why don't you take it from the pile of money you are sitting on? And if you don't sit on a pile of money, should a new TV really be what you are worrying about?
Absolutely, if the person wants to direct their resources toward a new TV. Generally speaking, people should spend their money on whatever they want to. The inherently subjective matter of what to do with one's life and time is properly entirely up to the person in question.
It's more nuanced than that. It encourages people to get a line of credit and demonstrate that they can be responsible with it. There's no need to actually be in debt, and this doesn't help your credit score.
In the UK, I can build an excellent credit history by having credit cards, but paying them off within the month, incurring no interest whatsoever.
The problem is that the credit system was not designed for society, it came out of a business need. In reality, you don't need a good (or any) credit score if you don't need a loan... but if you do need a loan, the person giving a loan wants to know if you're likely to pay them back.
The credit agencies decided they were scummy enough to collect as much personal info as they could, and sell it to those companies so they could asses that risk... When you get a full credit report, its actually data about you and your accounts, the score is just the distilled version of that data to make it "easier".
Finally, credit score is not always the last straw, depending on what kind of business you're working with. Many smaller companies might be willing to work with you regardless of your credit score, however, they might adjust the terms of the deal...
I think in general it’s a matter of philosophy: so you think that loans are there to serve society (mortgage is a good example of a “necessary” loan), just like banks have a function to society.
I personally can see both sides of the argument, but am I really not feeling like I’m missing out on something without it. Just checking your current financial status rather than historical seems sufficient to me.
People are buying and selling at huge values, and maybe winning a little here and there on upswings in the market, but the banks win either way with their steady monthly payments.
The Netherlands has the Bureau Krediet Registratie, which is pretty similar to the credit ratings in the US. (Arguably, the credit rating system in the US is slightly more forgiving than the BKR, but that's a separate matter - the Netherlands definitely does have this system).
France is actually the outlier for not having one - Germany and Spain both do, for example, as does the UK. And of course Canada, the US, and Australia have similar systems as well.
This is how credit ratings in the US work as well.
I was effectively required to get a secured credit card to demonstrate my "ability" to repay "debt". After doing this for some time, I was able to get a normal credit card, with a far higher limit and no security.
It's a little farcical really, that my ability to pay back a few hundred dollars monthly granted me access to a credit line far in excess of my monthly income.
Yes, that's not because you had a bad credit score, but because lenders in the US are more conservative and are generally unwilling to lend money to a person who doesn't have a good credit score. This applies especially to people who aren't citizens, even if they have legal residence and work authorization. You didn't have a good credit score - or any score at all. That doesn't mean you had a bad rating. If you'd had a bad score, it would have been much worse that what you describe.
The original statement was that "if you have never taken any loans, you will never have a bad rating". This is true in both the Netherlands and the US (barring cases of fraud and identity theft, which occur in both countries).
I don't object to _all_ debt. Yes, I took out a loan to buy a home and pay for my education. But the former made more financial sense for me than renting, and the latter is paid off and a big reason why I have the income to afford a home in the first place.
It's problematic how normalized holding credit card debt is in the US (at least, it is more so normalized than elsewhere in the world).