this post was submitted on 15 Feb 2024
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I don't think that changes the fact the system is illogical and stupid though. It's way too basic a system if that's how they're running it.
The system was built around the needs of the upper middle class and it suits them just fine. Someone earning $500k+ per year will have a whole lot of credit cards, loans, mortgages, etc. That diversity helps them generate the scores they need.
$500k/yr. isn’t “upper middle class.” That annual income is in the 99th percentile the US; it’s literally a 1%er.
You're spot on. I do want to point out, though, that upper middle class in the US is a household income of 90k to 150k. 500k would be solidly upper class. My apologies if you're referring to a different country.
I suspect that those numbers may be higher now, though. $90k won't buy you a house in any sizeable city, you really need to be at the $150l+ level. I take your point that $500k may have been a bit of an overreach in my original comment.
Upper-middle class and upper class aren't defined by spending power. It's based upon the average wage of all earners.
Upper middle class: The top 15% to 20% of earners
Upper class: The top 15% of earners
It’s pretty good for most people. There will be outliers.
The problem is, we have massive faceless banks that cater to nearly everyone. They need some system to gauge how much of a risk an individual lendee is.
The only real fair way to do that is based upon their reputation with other creditors over the past so many years. There’s a lot of metrics they can use ti measure that reputation, but all of them suck if you have little-to-no reputation to begin with.
Small community banks and credit unions had some more flexibility here since the bankers knew you, personally. However, I think it’s pretty obvious how subjectively judging someone’s credit worthiness can have some serious consequences based upon any -ism or -phobia you can name.
This is the kind of thing that seems good on paper, but in practice it alienates anyone on the outside of it. If you're born into a low credit score (i.e. born poor) you're automatically at a disadvantage. No one will lend you any money because you have a certain score, which in turn means you're never given an opportunity to improve your score. When credit scores start including rent payments, I'll be open to seeing it as equitable.
It’s not a perfect system. It’s just the best so far.
Everybody starts at the same baseline. Being born to a poor family doesn’t set you off lower than anyone else as far as credit goes, unless your parents start running up bills on your SSN, which happens, a lot. Cash and investments aren’t part of credit score at all.
Really as far as cash/cash-equivalent accounts go, just pre-paid credit cards that can impact credit, and they can only impact positively, and they are marketed exclusively towards the poor and those with bad credit.
If you want to be mad at anybody, really, it’s the predatory lenders. The payday advance companies, rent-a-centers, slumlords, and especially buy-here-pay-here car lots. Those guys that will sell and repo the same car over and over again when people don’t make payments with exorbitant interest rates.
Hell even Sprint PCS back in the day. They’d give anybody a phone with a $150 deposit.
All of them will pull a credit score at the start and then only report delinquent accounts. These are all aimed at people who are poor or have bad credit, and can only negatively impact the score.
Most of these are all run by sleazy local businessmen. Wealthy, but still exceptionally far from the super rich.
Honestly this sounds like one of the few times where the banks actually have the customers best interest (bank pun) in mind. The credit score formula is well understood (even if it’s not fully known by most people, since it’s proprietary). The risks and benefits are disclosed and agreed upon. Customers are expected to know how to use their products properly. If they do, the bankers may even sweeten the pot with some cashback or points, and provide an improvement to their reputation with the banks. If they don’t, they pay the pre-disclosed interest rates and late fees, and they earn a bad reputation with the banks.
I know it sounds like I’m shilling for the banks here. I’m not. I’m just saying this isn’t the right fight.
To turn it around, suppose you are a wealthy lender. You have three total strangers asking you to lend some cash. On what basis do you determine how risky it would be to lend them money? Or do you assume they are all an equal risk and give them all the same offer? Credit scores serve the purpose of determining how risky a credit customer is, based upon their reputation with others lending goods and services. Assuming an equal risk will either make you a loan shark, or you won’t be a wealthy lender for long.
Now, I’d be very impressed if the banks adopted a fully disclosed formula. It’s great that we can pull our full credit reports for free and see what they see, but what would be better would be to know exactly what they are basing their decisions on. It’s understandable that they’d want to keep that close to the chest, though. In a time of formula-based automatic approvals/denials, it’s only a matter of time until someone figures out how to game it.
They can/do include rent, but landlords tend to only report it if you're delinquent.
From what I understand it's a pretty shit system that doesn't work that well.
From the example posted here, it'd be extremely trivial to set up a system that doesn't deduct points because you paid off a debt. That makes zero sense.
Some dude may have come up with a basic model 20 years ago but it needs updating - any half decent data scientist at this stage would be able to build a better system.
A lot of the FICO scores (there are different scores for different things) don't ding you for it, but most of the monitoring apps use Vantage.
I find the difference between my FICO 8 and Vantage 3 to be as much as 100 points. Most people seem to have higher Vantage scores, but my FICO tends to be higher. They're different companies that use different systems.
It only negatively impacts your credit score if you are a bad credit customer.
A good credit customer with low credit would be one that has a few credit cards. They likely have a low limit because they have poor credit…say $750 each on three cards. A good credit customer would not let the balance exceed 1/3 to 1/2 of the limit, and pay the statement balance in full.
Now, suppose this person has these cards for one year, and another person with no credit cards or history, buy a 36 month car loan valued at $5000. To make the math simple I’ll say 0 interest, it doesn’t really matter for this level of explanation.
Customer A understands the game. They do exactly what they are supposed to, and are rewarded with a better reputation with the creditors, as well as a higher limit on their cards…lets say $2000 (though being a good credit consumer, they still do not charge more than they can afford to pay each month, and keep their balances under 1/3).
At the 35th month of this car loan, Customer A has:
Meanwhile customer B has:
Right off the bat, Customer A is looking like a far safer customer to lend money to.
At the 36th month, Customer A has:
Customer B has:
At the 40th month, customer A has:
Customer B has not changed.
It’s not that Customer B did anything wrong by laying their bill on time, it’s more like a divide-by-zero error. The sole source of information on their credit reputation has stopped reporting information and reported that they have ended their business relationship on good terms.
Had customer B been more like customer A (and honestly, those rules aren’t that hard to stick to…don’t charge too much and pay it off every month. That’s a very low bar to set for responsibility), it would be a little blip on their report that would even out over a few months. But because they didn’t, there is no new information coming in about their behavior as a credit customer. For the lenders, they aren’t following “no news is good news”. They need data to show that you are still willing to play by a very simple set of rules.
Maybe we just shouldn't have massive faceless banks then? No one is asking for that
But we, the consumers, did. By putting all our money in them, and continuing to bank with them as they gobbled up all the local banks and became mega banks.
It’s a consequence of the barely-regulated capitalist system that we have, sure, but it was driven by decades of consumer (mostly boomer) complacency.
I never asked for my bank to be bought by another bank. I have no say I'm the matter and it keeps happening. Pisses me off every time. I switched to a credit union
Then you did the right thing.
Unfortunately, you are an anomaly.
Even more unfortunately, the big banks have more power and capital and as a result can offer loans on better terms than the small community bank or CU. For a credit customer, even a half a percent can make a huge difference in monthly payment and total cost.
For the credit customer faced with the choice of which line to sign on, it’s really tough to stick to your guns and pay more, intentionally putting yourself at a disadvantage.
Example, when I bought my wife’s car, I came in with an approval letter from my CU. The interest rate was really good. But the bank was near my work, an hour and a half away, and I’m a telecommuter now. Ain’t nobody got time for that.
Still, I told the salesman to run it with their banks. I doubted they’d be able to beat the rate.
They did. By a quarter percent. Not much, but when it also means they handle all the paperwork and I don’t have to take 3 hours out of a weekday to drive into and out of the city, plus actually handle the paperwork myself…
I went with their bank. Sue me. At least it’s a community bank.