Credit Score Borders on Being a Scam

[cgervasi]

The whole concept of a credit score is questionable.  At best it's your reputation for paying debts as agreed distilled into one number and an indication of how much banks want you as their customer.  The "scammy" part of it is they promote it as a key to responsible personal finance.  If you do really well at it, they're more likely to let you buy their product (debt).  It's sort of like the "negative sell" where a potential customer is arguing with the salesmaker, so the salesmaker says "Maybe this product isn't really for you," to get the customer arguing, "Yes it is.  I am buying it."  

I think it's fine to borrow money and pay banks interest.  If you do, it's good to pay as agreed, which generally leads to a higher credit score. But what really matters is having wealth: real estate, investment accounts, a profitable small business, bank accounts, retirement accounts.  

The credit score formula counts it against you if you move house frequently, if you open and close accounts, and if you're near the limit on your credit card.  There's nothing inherently bad or good about doing those things.  I wouldn't think of changing my plans to be a more attractive customer for banks.  

[tagteam · Accepted solution]

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@cgervasi wrote:

....what really matters is having wealth: real estate, investment accounts, a profitable small business, bank accounts, retirement accounts.  

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I agree, but none of the assets you mentioned, standing alone, would be relevant factors for a creditor to consider in determining whether or not you would make timely payments on a loan (mortgage, credit card, etc.) as agreed.

[cgervasi]

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@tagteam wrote:

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I agree, but none of the assets you mentioned, standing alone, would be relevant factors for a creditor to consider in determining whether or not you would make timely payments on a loan (mortgage, credit card, etc.) as agreed.

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Yes.  They don't matter to the score formula; they matter to the individual or family. That's why I think the credit score formula is partly bogus.  They promote the score as being important to the individual, but it's really important to banks.  Having assets (net worth) is what matters to the individual.  

[Opus 17]

And?  I suppose you could only patronize lenders that don't use credit scores, if you can find one.  Otherwise, they seem likely to remain with us indefinitely, or until someone invents something better. 

[cgervasi]

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@Opus 17 wrote:

I suppose you could only patronize lenders that don't use credit scores, if you can find one.  Otherwise, they seem likely to remain with us indefinitely, or until someone invents something better. 

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My point is not to avoid dealing with people who use credit scores or to make people stop using them.  I'm saying they're not aligned with the interests of the people being scored. They're a measure of if the bank would like to sell products to that person. My problem is the claim that it matters in itself to the individual being scored. 

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@Opus 17 wrote:

And?  

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Build wealth. Live life. Part of that is consistent with "building a credit score".  If you purposely don't pay people as agreed, it's not only immoral but as you build wealth the people you owe will rightly sue you to get what they're owed. 

Things like how long you stay at one address and how many accounts you have open are things that matter to banks, but not their customers.  Generally borrowing money that requires a high credit score is a bad thing because it means the debt is not well collateralized so the lender is depending on the borrowers character and capacity to pay from her earnings.  This is not consistent with building wealth.  

[Eggsplorist]

Credit Scoring agencies do not consider money management. For instance, they say I "have too much debt" because, basically, the ratio of my mortgage balance (which is 38% of the value of my house) to my income is "too high." Well, my mortgage interest rate is 3.75%, and my investment portfolio (which exceeds my mortgage balance) is up 23% this year as of today (11/9/2020.) My monthly mortgage payment is an easily manageable 32% of my monthly income, net of income tax and medical insurance. So why would I sell investments to pay off my mortgage?

Also, I have my routine monthly bills paid by my credit cards (which I pay in full each month.) It is just a convenience to me to avoid paying so many different bills throughout the month (it also assures the bills get paid timely! Three years ago, I missed a very minor [$15] Kohls bill for 30 days and the credit agencies whacked my 850 rating over 100 points.) Now, sometimes the total amount accumulated during the credit card billing cycle exceeds some percentage (6% I think) of my credit limit on the card account, so they decrease my credit rating one or two points. (I understand there is some way you can time when to pay your monthly credit card bill so the credit card company will report a $0 balance to the credit reporting agencies, but I haven't figured that out yet.)

[NCperson]

<<I'm saying they're not aligned with the interests of the people being scored. >>

that is correct! they are aligned to the Banks as THEY are the ones lending the money! 

Credit Scores are powerful indicators of a borrower's willingness to pay money back, which is what the Bank is attempting to determine.

[Eggsplorist]

I notice your use of the term, "willingness" vs "ability. . . ."

[tagteam]

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@Eggsplorist wrote:

...(I understand there is some way you can time when to pay your monthly credit card bill so the credit card company will report a $0 balance to the credit reporting agencies, but I haven't figured that out yet.)

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That would involve making a payment prior to the closing date so your balance shows $0 or a small amount of credit utilization at closing.

[tagteam]

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@Eggsplorist wrote:

I notice your use of the term, "willingness" vs "ability. . . ."

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Since the end result is the same, it is probably just a matter of semantics.

[NCperson]

not really.....  Banks are required by regulation to determine the "ability and willingness" of the customer to repay debt as part of the underwriting process.  I can see @Eggsplorist 's point that the credit score could be more indicative of their ability to pay more so than their willingness, but it is certainly both.   

If  someone pays their other credits timely, it shows the ability to do so and it also shows a willingness to do so.  Higher credit scores are strong predictors of ability and willingness.  

Someone could be able to pay a debt, but not willing (e.g.  poorly organized financially but has plenty of money in the bank) or not able (e.g. loss their job but otherwise is a virtuous individual who would be willing if they had the cash).   Both get reflected in a poor credit scores. 

[tagteam]

My point was that the same result would obtain either way; the lender is not repaid.

Also, to the best of my knowledge, the rule that exists is the "ability to repay", which makes sense because a borrower could have the absolute best intentions and be more than willing to repay the debt, but that debt cannot be repaid if the borrower does not have the means to do so.

See https://www.consumerfinance.gov/ask-cfpb/what-is-the-ability-to-repay-rule-why-is-it-important-to-me...

[cgervasi]

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@Eggsplorist wrote:

 For instance, they say I "have too much debt" because, basically, the ratio of my mortgage balance (which is 38% of the value of my house) to my income is "too high."

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Do the credit bureaus consider income? I've never noticed seeing income on the credit report. I thought they relied on information from creditors who don't necessarily know their customers' income.  

BTW, if you keep the high investment returns and they compound, your mortgage payment will become an increasingly smaller percentage of your income.  The banks will love you.  The increased wealth plus the banks' love together will be worth the value of the increased wealth. 😀

[tagteam]

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@cgervasi wrote:
Do the credit bureaus consider income? 

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I do not believe they consider income in the matrix. The following are the factors in credit scoring.

Payment history (35%)

Amounts owed (30%)

Length of credit history (15%)

New credit (10%)

Credit mix (10%)

[NCperson]

it's a CREDIT report - not an INCOME report 🙂