The credit score system is broken, critics say | Hacker News Reader

The credit score system is broken, critics say

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36 pointsBender40 comments

Distinguish the concept of a credit score system with the particular implementation of one used in the US today. If your friend Bob, who's never asked to borrow money from you before, asked to borrow $100 from you today and promised he'd pay it back in a week, what would your answer be? Would your answer change if you knew that last month, he said the same thing to 6 of his other friends and never paid any of them back? If that would make you tell him no, then you do support the concept of a credit score system. There's definitely a lot of problems with our current credit score system, but it's way less bad than not having one at all, in a world where almost everyone needs to borrow money to be able to buy a house or car.

There’s a difference between credit scoring and credit reporting.

Credit scoring refers to the act of reducing the entirety of one’s credit history to a single number using an algorithm.

Few people are opposed to credit histories being available to potential lenders. However many find the scoring system to be unnecessary and flawed. Lenders could just look at the actual credit history to make a decision.

Ok, I'll chime in; I'm opposed! :)

I'll agree we need a system of credit histories, but what we've got now is terrible. The current vendors have no serious liability for breaches, and are pretty lax in how they do things. I'm opposed to the way they do it now.

Things could be much improved, and transparency brought into the process. Make vendors accountable for privacy and accuracy.

I don't think it will happen anytime soon, but this is something congress can fix, but they just don't have the will to.

You're talking about credit reporting. A credit score is where you deny someone a job or refuse a home loan or charge them more for rent because they paid all their bills ahead of time and never took out a credit card or grew up in a certain neigh orhood.

That’s how people in the third world borrow from 100 people who don’t know that the borrower hasn’t paid back to 99 others. One fine day, the borrower disappears from where he lives and then files bankruptcy.

Credit scores make more sense once you understand that they measure your potential profitability to a creditor, not your creditworthiness.

That is why , for example, when you cancel a credit card your credit score goes down.

I agree; The credit score system is full of abuse. But, and I ask this genuinely, what’re the other options?

If I’m a bank that’s has never heard of Joe Schmo (who’s asking for a credit card), how do I know how much credit to give and at what interest rate? Sure, I could give them a very low limit and high interest rate, and both would improve over time, but if my competitor next door can extend $5k at 15% by looking at Joe’s credit score, why would Joe come to me?

The reason credit scores exist is because there’s a market for that information, and the three companies took advantage of that. But because of that market, abuse had to be controlled, and Congress produced the FCRA. But even with that, there’s still the mess we have today.

Afaik in Belgium, and in most of th EU, there is a credit registry, managed by the governement. If you have too much debt, you get on a blacklist and won't get off until enough is paid back.

While far from perfect, it seems a lot better than the USA system. But it requires a functioning ID system and some trust in the governement.

The idea of a government run debtor blacklist has been thoroughly demonized in America for the past decade through news stories about “social credit” in China. Maybe it works in Europe but if you wanted something similar in America it’s going take a long time for people to forget that stuff, even if it was sensationalized.

Because private companies such as Experian and Equifax have worked out so well. Surely they have had no instances of massive data breaches or anything that would impact millions of individuals adversely.

The government threatened to cut people off from the water and sewage system if they didn't agree to pandemic rules. In the USA it is expected that any power the government achieves will eventually be abused to harm non-compliant citizens. In this case, if you don't agree to the whims of a bureaucrat, you lose access to credit. With the current system, that wasn't an option, but it's been made clear that any power they get their hands on, they will abuse. As long as that's the case, people will prefer the current broken system run by sociopathic corporations over one with the government in control.

> The government threatened to cut people off from the water and sewage system if they didn't agree to pandemic rules.

I did some searching and wasn't able to find any information about this. Do you remember where it happened or where you read about it?

I'd argue that many people don't need credit at all outside of a mortgage, which really should have a real investigation into your financial situation anyway.

We used to have that. It was clubby and racist. If you went to church with the banker, you got a mortgage. If you didn't and your last name was uncommon or Slavic or something, you didn't get a mortgage.

My reading is humanwhosits is just proposing what we have today, which doesn't have those problems.

When you get a mortgage today they verify your assets, debts, and income. There's less of a need for a score if they're already doing all that.

I don't know that the article did a great job making its case beyond using dramatic language.

I'm sure a non-zero number of errors are expected in any system like this that depends on various institutions reporting to the credit bureaus on the status of payments.

Numbers of affected people thrown around in the article are in the thousands to hundreds of thousands.

There are about 250 million adults in the USA. So, if 300,000 have some kind of error in their credit score, that's a 1.2% error rate, and Equifax has since corrected that particular error.

700,000 made complaints to the CFPB, and about 60% of those related to scores, so about 420,000. So, this represents less than 2 percent of adult Americans reporting an issue with their credit scores.

I am sure these error rates could be improved, but I'm not sure I would jump to the headline's conclusion that "the system is broken." It seems like the system is functioning, has some flaws, and that if the error rate improves even a little bit they're not all that far from what most people would describe as an acceptable error rate.

> and that if the error rate improves even a little bit they're not all that far from what most people would describe as an acceptable error rate.

A 2% error rate is not super acceptable depending on the outcomes. IMO, the big issue: most of the cost of errors is externalized to random consumers.

e.g. I ended up having to fight with multiple agencies as they shared information with each other. They were each, at one time or another when I was 18-22, utterly convinced that I was an alias of a 45 year old guy racking up medical debts a few states away (who happened to have transposed his SSN to give mine on a form once). I also received harassing calls from collectors that I couldn't identify who enjoyed mocking my predicament and not complying with statutory requirements to stop calling me. It's not very fun to be really excited about a girl, and after you take her home for the first time, to receive a call that plays on your answering machine mocking you for being a deadbeat.

I was unable to access credit, which greatly complicated business travel, etc. For many years to come, ordinary transactions-- even buying a car with a cashier's check-- were complicated.

It was an ongoing ordeal that lasted years, despite me having some degree of know-how on how to address it (but relatively little time to do so). It is an embarrassing ordeal to have to constantly have awkward discussion with bankers when this bad data happens to pop up and rear its ugly head again.

And, I didn't end up making a CFPB complaint, because as angry as I was, I had other things to do-- so, I'm not included in your counts.

That sucks, it really does. Unfortunately, it's just an anecdote.

My anecdote? I have some relatives who had an identity theft issue, and it was a pain for a couple of months but then it was just another one of those bumps on the road in life and a story to tell.

> Unfortunately, it's just an anecdote.

No, it's part of the distribution of outcomes that the current system can produce.

Someone getting killed down the street from me is not "just an anecdote", either, even if I know a bunch of people who walked that path just fine and there was one other one guy who "only" got mugged.

Think about the complete lack of care that produces a system where if someone accidentally uses your SSN once (or perhaps it was a single keying error by someone else), that it can cause repeated associations between you and that person for years.

The problem is that most of the cost of errors is externalized to consumers, especially in the worst cases. The only incentive to prevent these errors and mitigate these errors is to do the bare minimum necessary to avoid the regulatory or legislative hammer.

The error rate likely would drop if there were actual significant consequences for having created the errors in the first place. There are fines if a company refuses to correct errors after a "good faith" effort on the part of the consumer to challenge the error and people do win those cases, but the process is tedious and shouldn't put the burden on the consumer. Plus the fines are too small to matter in most situations. It's just another cost of doing business that is less than the cost of preventing the errors from occurring at the current rate.

I’ve done all of the things that all of the blogs suggest to keep a decent credit score, but my score is extremely volatile and bounces around in a 200 point range month to month which never made sense to me, but every avenue of complaint fell flat. Then about three years ago I got a rejection letter that said one of the credit bureaus had me categorized as someone likely to run up a good score then bust it out (I forget the term they used) - no history of me doing this but apparently that’s my profile. So if I carry any balance on any card my score immediately drops 196 points, if I pay it off the next month my score jumps 196 points. That sawtooth pattern has been the norm for about a decade. That doesn’t match up with anything that I’ve read about so it seems the credit bureaus actually have a specific policy just for me. Maybe I’m living in the wrong neighborhood, or maybe I’m guilty by association with somebody, who really knows. It doesn’t really stop me from doing anything, if I want a new credit line I just wait until the month when my score is up 196 points, but it might be a problem if I was ever in a situation where I could not wait 8 weeks - like if I’m buying a house or need a car.

Really interesting. Mine has been withing 5 or ten points for 10 years across many zipcodes. The only exception was when I let a bill go to collections and it dropped ~30 pts and slowly recover over a year. Could it have to do with your % credit utilization when you leave a run a balance. If you up your CC limit to 20x your balance, your issue may go away.

You are supposed to be ok as long as you don’t use more then 30%.

That's not my understanding.[1,2] Utilization under 30% still hurts your score.

Utilization % and type of credit utilized account for 40% of your score [3].

Given the big transient swings timed to match exactly with your utilization, this is all that could imagine is going on.

Seems like an zero cost solution you could try.

If you have a decent job, it is pretty easy to get large amounts of credit up to a couple hundred k. The average person with an 800+ score has <5% utilization, so aim for that when you run a balance.

>https://www.nerdwallet.com/article/finance/30-percent-ideal-....

>https://wallethub.com/answers/cc/best-credit-utilization-rat...

>https://www.investopedia.com/financial-edge/1111/what-credit...

> Utilization under 30% still hurts your score

I don't think this is right, and your first supporting link directly refutes that in the second sentence.

how so? seems clearly the opposite to me.

>Many credit experts say you should keep your credit utilization ratio — the percentage of your total credit that you use — below 30% to maintain a good or excellent credit score.

Credit utilization is a major factor in your credit score, so it pays to keep an eye on it. View the 30% rule as a good guideline, but be aware that using even less is better for your score.

Yes using less is better. That's what I'm saying.

I’m not a fan…the credit score system kept me homeless during my freshman year of college even though I’d saved up enough money to pay a year’s worth of rent.

One year I prepaid an entire 12 month lease in cash (well, a wire transfer). They didn't run my credit or request income verification. Did you try this?

Yes, they wouldn't accept it because my credit was poor. I told them I could cut a check or go to the bank and get the cash for a whole year but they didn't want it because my FICA was in the crapper (thanks former roommates!).

I literally just had a huge problem for my credit score. Apparently I cancelled a credit card for the water company which supplies water to a small property I own. They sent mail to the address telling me to pay, but no emails or texts. By the time I retrieved the mail I was four months in debt and they had already called collections on me.

Now I have a major negative event on my credit report that won’t go away for seven years. Over $150 of total late fees. My credit score dropped nearly 70 points. All because I didn’t check my mail for a few months while traveling.

I really hate this system with a passion. A deep and profound passion.

This is my #1 fear going to a doctor. I change my address every 6 months or so for work/study purpose, and I have to specifically ask the clinic to send me unpaid bills over email instead of mail. Sometimes I wish the US could swear off sending bills over the mail and just do it electronically.

Have you already paid? Ask for a "pay for delete agreement" if you haven't

When I spoke to collections they assured me it wouldn’t end up on my credit report, so I payed.

Sounds like fraud. Do you have the communications?

Unfortunately not, because it was over the phone.

I vaguely recall that even in 2-party consent states recording lawlessness is still legal. Are there a y lawyers here who could chime in?

> Equifax said a sizable number — less than 300,000 people — saw a shift in their credit scores of 25 points or more because of the error. That's more than enough for some people to be denied a loan they should have been granted.

Surely any amount of error could result in people not getting loans when they otherwise should have? Also what about the people who got loans when they shouldn't have? (unless the error was systematic in one direction)

It's not broken, it's doing exactly what it was created (quite recently btw) to do.

To clarify: I think it's bad!

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