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Comment by siliconc0w | Hacker News Reader

The big banks are terrible if you fall outside their algorithmic expectation. My partner and I were trying to get a mortgage and despite near perfect credit, large incomes, etc our apps were auto-denied because I never opened multiple open loan lines. Never needed them, just used CCs I immediately paid off for points as I always had a job/savings and bought cheap used cars for cash. We eventually got one but it took far too much time, effort, and spraying our personal info to providers. Once you get an algorithmic denial or even cant access your money because their garbage site isn't working and you can't even get someone on the phone who can tell you why much less fix anything, you immediately see the need for breaking these banks up.

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Credit scores make more sense if you think of them not as scores of your ability to pay back debt, but as scores of likely profitability for the creditor. Someone who never carries a balance and never will pay the occasional late fee is less profitable and thus has a lower score.

I think you need to factor in risk. This is a simplistic example but demonstrates the influence of risk.

Who would you rather lend a mortgage to?

- Group A, consisting of people who prudently pay debts early

- Group B, consisting of people who pay debts on their due date, and sometimes after

Let's say you lend $100B to each group A and group B. Historical data might show that in aggregate, group A has a default rate of 1% and group B 5% (there's 5% chance that a person from group B defaults on the loan).

Because of defaults (risk), you expect to lose $1B of principal on group A and $5B principal on group B. To break even, you need to charge group A interest that would at least offset their $1B loss, and charge group B interest to offset their $5B loss, hence group B's higher interest rate. One group is not automatically more profitable than the other.

Group B might incur more costs such as late fees, but this only works against their ability to make future payments.

Risk is for sure a large component of profitability, I didn't mean to imply otherwise. But risk is not the only factor and credit scores often seem to track the total profitability curve better than the risk curve.

Totally outside my wheelhouse, but I'd imagine that interest on debt could eventually make group B more profitable if the default rate isn't too high. Or perhaps have group A partially cover the interest of group B because they're lower risk and likely have higher income.

I imagine that late fees increase the cost of repayments while debt interest increases the number of payments thus not hindering the ability to make future payments.

It’s more than that - banks used to have prepayment penalties. People with high credit scores are (probably?) also more likely to move, which means the bank may only get a couple years of interest until you pay it back (when you sell to buy a new house with a new mortgage), vs. people who stay in their house for many years. These things mean that someone with a lower score may be a better investment for the bank.

If it sounds ridiculous… imagine that every month, all the mutual funds you are invested in shut down and gave you your money back (with interest), and you had to choose from a whole new set. Some of you probably do this anyways, but most people prefer to make the choice once and then just let it grow.

How to improve your credit score ... get credit cards and pay most of them off, but never close them.

Once you have established credit you will then be offer 0 APR credit cards for 12 to 48 months. With a zero APR credit card that has a balance say of 10,000 your monthly minimum payment is 1% of that so $100. $20,000 $200 a month ... once the APR promo ends transfer it to another card with zero APR.

Closing credits has hurt my credit so i keep them open and locked, as well establish email alerts on all of them for different scenarios to monitor them.

Not necessarily.

My credit today is good, but not perfect. I have trouble getting any new credit card. All for the same stated reason - too much available unused credit.

I'm sure my score would dive if I closed a bunch, just pointing out that having a bunch isn't always a good thing.

I subscribed to both the Experian and Transunion apps. Both I quickly open either app and lock or unlock my credit(Transunion allows you to lock/unlock Equifax too).

I can also see my credit scores as much as I want and ensure that I am using no more then 30% of my total accumulated credit limit. For example say I have 10 credit cards equally $100,000 combined then as long as don't have credit debt higher then $30,000 my credit remains good to very good to excellent. Your score will be negatively affected if your debt went to 31K and higher.

Another good thing is both apps alert me immediately when theres a change to my credit.

I pay about $50 a month for both, expensive yet well worth it especially if your looking to buy a house(s) and you overall really care about your financial health/score for present day or the future.

I pay nothing for these services, have lived rent free for 3 years, purchase and pay off my credit cards to the tune of $2000 a month, and just bought a house hundreds of thousands over 500k with an interest rate 1.75% to 2% below what is shown on Google for the current rates for 30 year fixed rate. The lender credited me for all points. You don't need to waste 50 a month to make the bottom of the rate sheet. Just good negotiation skills and reasonable credit history.

That's cool and I was explaining how these apps have proved valuable and prove valuable to me. It is a bit of a racket, but I learned a lot by using them and able to lock/unlock my credit instantly (easily) and the other points that I mentioned that I found valuable (worth the cost).

How many know they can rack up $10,000 in credit card debt and only pay $100 a month with a zero APR card? Im not sure many know this especially those in their 20s and maybe early 30s.

So whose your lender.. love to get a 2 percent interest rate on my next house. Moving into one soon and its much higher then that.

1.75 to 2% below market, not 2%. Nobody is giving out 2% loans right now haha

That doesn't make sense. A credit card provider may profit more from a customer who carries a balance and maybe makes the odd late payment, but a mortgage provider inherently has a customer who carries a balance, and the ideal is a customer who makes payments on time every time, for the life of the mortgage.

There's sense in what you say and that's one reason why different scores are sometimes used for mortgages vs CCs etc. But one could also imagine ways in which zero risk creditors might be less desirable to mortgage lenders. They might be more likely to prepay the loan or refinance quickly and stop making those interest payments prematurely. I payed mine off massively early due to some good fortune - wonder if the mortgage company was annoyed they went through the laborious process of approving the loan and only got a few years out of it.

Fair point. It's a sorry state of afairs when you have to speculatively reverse engineer the algorithms run by a state-sanctioned oligopoly of private firms holding your own data gathered with, at best, coerced consent, and artificially structure your affairs in an attempt to present yourself as a dependable and unadventurous cash cow

You accurately, amusingly, and concisely articulated the situation. In a way that underscores the absurdity of it.

> The big banks are terrible

Fixed that for you. The big banks have one thing going for them, they're big. That means they will have a wide network and a large service organization, but most feel no need to meaningfully compete for your business. You're going to use them because they're big. You're not going to get meaningful interest on your deposits at a big bank, because they don't need your deposits; bankrate shows me rates up to 4.75%, with banks I've heard of at 4.3%, Ally at 3.75%, my credit union at 2.5% (at least it's moving up, although the pace of increases is a lot slower than the decreases were :/), and Chase is at the national average of big banks: 0.02%. Certainly, 0.02% was understandable in the zero-rate environment, but I'm pretty sure it's been Chase's interest rate for the last 30 years (no data, just a hunch). Mortgage rates float in and out of competitiveness, especially if you jump through the hoops for a relationship discount; that's a good business where volume means profit at origination, and it's easy to sell the loans if they want to (that's part of why their underwriting is so cookie cutter; gotta make it easy to resell).

If you're in the SF Bay Area, you should really check out the local credit unions; some of them are pretty decent. Co-op/shared branch banking takes care of most of the access issues, but you might want to be aware that after hours telephone service is directed to a shared branch call center. My credit union holds and services the mortgages they originate, which means you don't have to deal with the servicing changed dance, and also they're able to do limited paperwork rate adjustments for a reasonable fee; much simpler than a refinance.

Even if you're not in the bay area, you should check out credit unions or really anything else (Wealthfront, betterment, withcompound, just buying bonds/tbills, etc), so you're not getting approximately 0.0000% on CDs.

As for the limited paperwork rate adjustment, the word you're looking for is recast (instead of a refinance), and it's fairly common

> despite near perfect credit

Your credit wasn't near-perfect. You hadn't defaulted, but that's far from proving that you can manage your credit/money and make payments on time. A hobo who lived in the woods would also have never missed a payment.

Would that hobo have used a CC that he immediately paid off? That needs to count for something.

It counts for something, it's just not enough by itself normally.

But he said that he used credit cards and never missed a payment. That should count, right ?

I can relate, as I came in US from Europe. I arrived, opened a bank account in a big bank, I could only get a debit card, because I had not credit history. After few months I could get a credit card, but with a $500.00 limit! I needed a car, so I bought one cash.

When came the time to buy a home, I was asked to open more credit cards (one was not sufficient) and come back in a year or so later, to see how my score would improve.

You never proved you could handle more than $500 in debt. You then asked for maybe three-orders of magnitude more debt. Surely you can appreciate that difference.

There's no difference at all for someone who works a dayjob. The only thing that matters is that you have you demonstrated that you can make a fixed monthly payment reliably. Paying your bills, paying your rent, paying your CC all demonstrate that. If you rent a $1500/mo apartment you actually have managed $18k of debt.

Doing the same thing but this time with interest proves nothing the others don't. Borrowing history makes sense for businesses or people who with complicated cash-flows. But if you're stably gainfully employed the only things that matter is how you manage your external financial risks (which banks don't check for) and your ability to not over spend (which banks also don't check for).

Combine this with the your typical mortgage is overcollateralized means the magnitude of the loan is essentially meaningless outside of "is the monthly payment something you can afford."

But what if they discover alcohol/drugs/gambling/etc? They'll fall off the tracks and the loan will never get paid back. Which ofc is incredibly stupid, classist, and racist to boot. And not even a guarantee by someone's credit score. But with a credit score, you have a metric of just how much money to trust them with (not really), which can be plugged into the spreadsheet and you can hire an army of mortgage brokers to plug stuff into the spreadsheet.

Credit score is a moralizing system that hates the poor, so it's unsurprisingly embedded itself into American culture by three corporations that will never be held accountable (see: Equifax leak).

It's as American as the bald eagle. I'll stop now, my cynicism is showing. I just don't see a way to get to a place where we don't have the current trifecta of credit scoring corporations running our lives without a giant pile of money to start a competing credit bureau that makes and underwrites loans based on different computation of a person's score. Because a credit score was initially for rating people on their ability to pay back borrowed money. It's just been perverted since its inception into what we have now.

> . If you rent a $1500/mo apartment you actually have managed $18k of debt.

I agree. And slowly credit scores are starting to take rent into account.

> There's no difference at all for someone who works a dayjob.

But there is a difference. If you put your living expenses on a $500/mo credit card, you can have a $120k job and be eating ramen, living in a flophouse and spending the rest on drugfs or supporting people who cannot work. You cannot afford to service a mortgage. If you commonly service larger debts, then they don't have to worry about hidden things sapping all your funds.

Your friend often asks for you to spot them $5 when you are out at lunch, it’s no big deal and they’ve always paid it back.

Now they want to borrow $5k all of a sudden. Do you give it to them, just based on the above history?

I absolutely don't spot them $5k all of a sudden, based on that history. I may based on other factors, but certainly not based on a long history of them borrowing $5 and returning it.

That seems like such an obvious answer to me I want to ask if you intended to ask that of me or the person I was responding to.

You’re right, mine should have gone to the person you were responding to, sorry about that :)

Let's make this more realistic since it's just mortgages but divided by 100. I'm bank of Spivak and you just submitted your loan application to me.

As part of your loan application I can see your savings, income, employment history, and credit history. The payment on a 30-year fixed $5000 loan is $35/mo with current interest rates so that's the bar I need to hit.

* I see that your monthly cash flow is $200 which puts your loan payment at 17.5% of that.

* You're putting 20% down or $1250 which demonstrates to me that you're capable of saving 35x the loan payment.

* Your borrowing history is sparse but you pay of your $5 Spivak CC every month which is 20% of the loan payment right there.

* The loan is collateralized by an appreciating asset whose market value is $6000.

Yes. Obviously I'm giving the loan. To second order no one has a six figure credit history. Their first mortgage is likely to be the first and last loan of that magnitude in their lives.

You gave them an income (post-tax?) of $200/month. Of course that makes it easy to loan them money.

It's also very easy to qualify for a $500k mortgage if you are clearing $250k a year. It makes me wonder how old you are, as "house prices are 2.6x a household income" is something that last existed in most places in the mid-1990s.

> To second order no one has a six figure credit history.

It is remarkably incorrect to treat it as a flat "no six-figure history means they are all are equivalent to a $500 history". Almost everyone has four-figure credit history based on credit cards, most people have five-figure credit history based on car loans and many people have six-figure student debts.

I'm '96 and currently looking to buy a house. I wouldn't expect to qualify for someone to give me a $500k 30yr/fixed loan unless I was pulling in $10k/mo. post tax which yeah, is in the neighborhood of $200k household salary and even then I would be stupid to take it.

I guess that is where Europe differs. They look more into what you currently earn (and how stable you are at jobs) than past debts.

So, if I have been making $100K for 6 years at the same company, with no credit card (I only used debit in Europe because there was very little incentive for me to use credit card that I pay at the end of the month), even though I have never had a debt before, they would be willing to give me loan. While in US, with no credit card before, they could not.

Interestingly, this expectation isn't universal in the Western world outside of the US. In Australia, the banks don't expect to see previous credit card management, and in fact the presence of an open credit card will significantly reduce your calculated borrowing power for a mortgage.

The myth of US-style 'credit score' requiring a history of card use does persist here though, and I've known several people who have had to close one or more credit cards in order to get their mortgage approved.

Weird thing is that when I got my mortgage, I had two credit cards (for airline points) and the broker was like “oh if you’re happy to close them you’ll be able to borrow more”, so we did the application based on that, but then the bank just didn’t ask me to… I still have them, years later…

I always find this to be a baffling thing about the American system. Where I live we never take out a loan (except for houses) and most cards are debit cards. The American system seems to punish the way we act here, like you, you can be perfectly credit worthy but you have not been a good loan-taking rent-paying citizen? It feels dirty to me.

What metrics do they use there to determine your loanworthiness?

Where I live there is a central register that identifies total exposure as well as red flags (late payments). Exposure is weighed differently. E.g. a 25k car loan might lower the acceptable mortgage by 25-100k because it’s backed by a depreciating asset and has higher interest rates. Similarly, a 5k credit card limit can have 2-5x the impact on a mortgage application.

loan/credit application is mostly based on your income (you can maybe borrow up to 4.5-5x your gross income for a mortgage), how certain your income is, for example whether you have a temporary or permanent contract, and if there are no red flags in the last few years.

Sounds like my country, but, I don’t know anyone who has a credit card to increase their funds nor do I know anyone with a loan for a car.

It also sounds to me that the difference between how we live here and the American system (I feel most people have loans for stuff in the 1–10k €/$ range in the US?) is a couple of months of living a bit more frugal, and the result is a lifetime of profit because you avoid all this interest everywhere.

Here it is common (and recommended by the government and banks) to have a 5k buffer. It could be my bubble but most people I know maintain that buffer. It pays for a new washing machine or even a new (crappy) car if needed.

Is it my view of the US based on Netflix that everyone has loans for the smallest of thing (like TVs) or is it really true?

No. Everyone does not pay interest on common purchases.

There is much more access to credit in the US, most Americans use that credit a moderate amount to smooth cash flow for bumpy purchasing.

It is certainly the case that there are outliers who overuse credit, and many people who abhor credit like it sounds like you do.

One of the biggest differences between US borrowing and the rest of the world is that bankruptcy is very very easy to access, has very little stigma, and clears out most debts.

This makes the perceived costs of carrying a large debt load quite different.

It is surprisingly true. Debt is a way of life for many people.

Monthly income and outstanding debts.

I feel it is important to call out the one’s credit score is not a measure of creditworthiness. It is a measure of an individual’s potential profitability to a creditor.

These two are not the same thing.

Is this why some people recommend to take loan for something that you have money?

Like - you wanna spend 30K on a car and you have it in cash? take loan

you'll lose a some $$, but you'll be building your history.

I think that the usual rationale for taking a loan out to pay for something you can afford without a loan is that you can take the money you have and invest it in something that pays more than what the interest on the loan is.

It's a kind of arbitrage. If you're losing money overall, you're doing it wrong.

There’s no free lunch. You will be taking additional risk by doing this even if the downside seems unlikely or remote.

If the loan % is lower than a savings account then there is no/0/zero risk, so long as you stay under FDIC limits. Your deposit earns money and is backed by the full faith and credit of the United States government.

The loan will usually be at a fixed-rate, while the interest paid on your deposits will fluctuate. So there is still risk that your net interest margin will go negative at some point.

Get a CD or buy treasuries with a matched maturity date. Or if you don’t want that and the savings rate goes below you can pay off any time (check your terms).

Yes, this is just a roundabout way to invest into stocks with borrowed money. There is probably an optimal portfolio for this strategy to minimize the risk but then it is no longer the obvious win that so many people think it is.

If we assume 8% returns and you only put 50% in the stock market and your loan costs 2% interest then your total benefit is only 4%. Putting all of it might get you 6% but you are now taking a significant amount of risk.

The last few times I remember, the interest charged on the loan was less than that generated by T-bonds of the same length.

I don't know what factory car loans look like now, but for my last new car, they offered me a 5-year 0% loan vs a $500 incentive if I paid in cash. Safe interest rate paid for the missed incentive. It's a smidge less convenient to have a loan, but no big deal.

In the face of persistent annual inflation, a 0% loan ends up yielding a net discount when compared to saving your money over the same time span and paying cash. Of course, that's only true if you're diligent about paying on time, but automatic recurring payments can take care of that problem.

You also want to consider whether it's more valuable to you personally to have that cash in hand. Are you going to roll it into another investment? Then maybe a low enough interest rate on the loan will put you out ahead despite paying interest.

Nah, you can easily get a residential mortgage from smaller lenders with just proof of income/savings, and the sort of light credit usage you get from monthly CC payments, rent, utilities. That will net you a solid credit score, too.

The issue is with very large banks. They have rigid underwriting deparments and poor CS, so if you approach them as a first-time buyer who isn't already leveraged to the hilt, they will make it a long and painful process. Mortgage agents are a prime target for AI replacements, because all they do is relay information between you and the underwriting departments that make the real decisions.

Other people have pointed out that when you take a loan for something you can afford, you can use the money you would have spent on other things in the meantime. (As long as you're confident that you'll keep making enough money to make your payments for the life of the loan.)

Rent and utilities rarely report to credit scores.

There's been normalization around using rent as additional inputs into a credit score: https://www.cnbc.com/select/your-rent-payments-can-raise-you...

I'm not sure they're all that available or popular (they're highly dependent on your landlord having the correct paperwork and such) but the place I rented an apartment last year had this available and it did get reported

Yes, that's been a push for a while. I'm glad to see it's becoming more popular. But it doesn't work if unless the landlord opted into their payment system.

That's such a strange system if common routine things aren't counted towards your score. Is this a ploy to get you to buy things you don't need just to prove you can pay it back?

Personally I've never owned a credit card, I always pay with a debit card or cash. 20 years ago I refused to participate in the credit scoring system and still stand by it.

I don't think it's a ploy. I think it's an accident of how the people who designed the credit score used credit. And then inertia keeping things from being updated.

It's messed up because rent could be let's say $800 to $3,500 a month, if paying that every month on time isn't an indicator that you have consistent income to reduce risk on other loans then I don't know what is. It's especially messed up if the same system will ding your score if you buy $8 headphones and forget a payment.

Things are slowly being updated. And rent not being included is a pretty big error that needs fixing.

Last time I got a loan they asked me about my rent/mortgage (and utility!) payments so they could subtract that amount from my take-home pay when determining the risk of me defaulting on the loan. They seemed to assume I'd be paying my rent first and consistently regardless of any other debts I'd accrued.

I think that's a valid assumption. That's also why it's easier to get a mortgage on your primary house instead of an investment property.

Reasons other than "it helps me build a credit history":

* you think you can make more money by investing your 30k and letting it grow and compound

* you are very prudent with your cash on hand and would rather have immediate access to liquid cash than save a little bit on interest which you pay down over the course of <term>

Some of the dynamics here are a bit different when market returns are not looking great/steady and money isn't cheap anymore.

> you think you can make more money by investing your 30k and letting it grow and compound

Mortgages especially. Mortgage interest is tax deductible and makes it easier for high tax bracket individuals to outperform their loan by investing.

> Mortgage interest is tax deductible

Since 2017, not really, due to tax law changes. Cap of $10k but that includes state taxes paid also.

I was under the impression that the $10k cap is for SALT and mortgage interest is separate? The mortgage interest deduction was reduced, interest on new loans is only deductable for the first $750k of debt, instead of $1M, and mortgage rates were really low in 2017; capped SALT + a relatively low interest rate on $750k might not combine to more than the standard deduction if you're married filing jointly. Certainly on my ~ $350k mortgage @ 3.15%, I stopped itemizing after the tax changes.

Absolutely not. That's property tax, not mortgage interest.

The bigger change for mortgage interest was the massive increase in the standard deduction in 2018 to $24,000 from $12,700. We were barely doing better than the standard deduction prior to that, and the increase put us pretty far into "just take standard" territory.

No. You need 2+ credit cards and ~2 bank accounts all that have existed for several years. "Carry a balance" of ~15% of your total credit limit BUT you need only _for the owed money to show up on the paper statement_. It's weird but if you pay off the thing you bought immediately that day, it's as if it never happened. It needs to be recorded on a statement, then pay 100% off before due date and don't owe anybody shit!

Curious how the parent commenter had great credit with no seasoned lines of credit. It's one of the biggest factors in the score.

Months before seeking a mortgage loan, learn the score's equation and appease it.

> you immediately see the need for breaking these banks up.

Why exactly is this the conclusion, as opposed to suggesting the big banks need better evaluation of borrowers (whether thats with better metrics or humans in the loop)?

All the problems being brought up seem like they could happen to banks of any sizes...

Something something "free market" something something "competition" something something "creative destruction"...

It's nice to believe throwing more greedy people at a problem will fix it, and hey, sometimes it works.

There are a lot of good reasons for it.

First, centralization and consolidation increase the risk of fraud and corruption, and malign influence with regards to antitrust.

Second, almost no new banks are being chartered. What do you think typically happens when you go from Many -> Few (single digits) -> 1.

If something happens because they play the bailout game, the only real option is for nationalization.

Third, their sector mandate is to loan money to businesses that can use that money to turn a profit and feed the economy. They've stopped doing that outside a few corrupt friends(entities).

What you often don't hear about is what happens when they are the only game in town, they know your business is stressed, and they refuse to loan to you on arbitrary grounds (behind closed doors) knowing they can buy it up in bankruptcy for pennies on the dollar for a larger profit.

Like what Amazon did to the baby diaper companies.

https://arstechnica.com/tech-policy/2020/07/emails-detail-am...

never buy a mortgage through an app. use a human broker or if you're rich enough, a bank salesman.

and for those of you who refuse to talk to people when spending multiple hundreds of thousands or even millions of dollars, well... this is what you get to deal with.

The human will type your information into the same system.

The human can likely also pick up the phone and talk to another human if the system is spitting back something obviously stupid. You don't need the human for the typical case; you need the human for the atypical case.

They also usually have a monetary incentive to make the deal work, which you cant get from a app.

okay, sure and probably half a dozen other systems you don't have access to. this is wholesale debt brokering, it's not available on a public website that you found on google with creative out-of-the-box keywords like "best mortgage rate <zipcode>"

the first step to not being a mark is understanding what you don't know, and working with people who do. you may still get marked to a certain degree, but at least you'll end up with a 2.x% interest rate like i did and no messages from the computer saying "you're too poor to buy this product, so run along now little man" when it clearly isn't true.

Everyone's downvoting, but this is what did it for me.

Especially if you have an unusual situation, brokers and personal bankers will know how to handle it.

I had 0 credit history in Canada (literally a completely blank printout), but wanted to buy a house now that I'm a PR. A personal banker was able to work with a copy of my US credit report (Canadian banks don't/can't pull this on their own), and proof of assets in the states. The first item on my Canadian credit report was cosigning a mortgage at prime rates.

When taking a mortgage you should prepare in advance. I took a couple of unneeded 2-year $500 loans, three unneeded credit cards and a car lease, all to jack up the credit score.

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