The fact that we haven't nationalized credit reporting absolutely baffles me. These companies have so much power over our lives, are completely unaccountable, and are so incredibly incompetent.
The whole credit rating system as it is in the US seems complete ass-backwards to me. It basically encourages people to go into debt to build a history of paying it back in time.
Here in the Netherlands it works exactly the opposite: the best 'rating' is to not be in the system at all. When you get a loan, the amount and monthly payments are registered. This registration is removed once you have paid back the loan.
When you ask your bank for a loan, they basically look at two things: how much is your income and how much are your current financial obligations (i.e. existing loans). Cost of living is subtracted from your monthly income, as well as the monthly payments of your existing loans (from the national debt registry). What's left is how much (additional) monthly payment you can afford. If the monthly payment for your newly requested loan is above this number it will be refused.
As such there is no such thing as a good or bad rating, only what you can and cannot afford.
> It basically encourages people to go into debt to build a history of paying it back in time.
How do you propose a third party can establish your ability AND desire to pay back a loan, i.e., determine how much risk there is in lending to you?
> As such there is no such thing as a good or bad rating, only what you can and cannot afford.
This is a completely naive line of thinking. Maybe you CAN afford a loan, but WILL you pay it back? Ah, you might say, the bank will remember that and refuse to loan you money next time. Congratulations, you've invented a system of credit worthiness.
> How do you propose a third party can establish your ability AND desire to pay back a loan
Ability is simply by asking for a recent payslip. For things like mortgages they usually ask for a signed statement from the employer as well (they declare that if employee continues to function as (s)he has been they have no intention to end their employment).
Desire doesn’t really factor into it. If you don’t pay your debt they will get their money one way or the other. Personal bankruptcy is not a thing over here, you cannot walk away from debt.
> Maybe you CAN afford a loan, but WILL you pay it back?
Of course you will, you have little choice. Worst case they get a judge to simply take it out of your paycheck.
I still don't understand. Of course getting a judge to take it out of your paycheck is possible in America too. But preferably before a bank loans you money, they want to determine whether they can rely on you paying back on your own or whether there's a high likelihood they will get a judge involved? What if the bank doesn't want the hassle of involving a judge? How do you even measure the probability of needing to get a judge involved? Then it's back to credit scores.
Obviously it’s a last resort. The point is that someone who can afford to pay and doesn’t is very uncommon as this would cause a lot of trouble for the person in question.
Then you might as well say that in the first comment. In the U.S. banks certainly already look at your income to make sure you can afford to pay. Credit scores just measure willingness to pay. And before AutoPay became popular, they also measure whether a person can consistently take care of their own affairs and remember to pay.
We have those too, but that's not exactly the same. Say you have a mortgage with a variable interest rate. A repeated scheduled transaction won't work because the amount can be different each month. Same goes for things like energy bills if you have a flex-contract where you pay the actual amount used each month. In my case they will just take whatever amount is due out of my bank account each month.
Makes a lot of sense to me. Are people penalized in some way for a history of mis-spending their money? For example, an individual who could afford a loan in theory, but gambles away all their money at a casino and misses loan payments.
Someone fiscally responsible enough to never need a loan in the first place (either because of higher income or simply from living in more humble needs) will have a lower credit score than someone who did need a loan. That's weird.
There are a million things broken about the American credit reporting system, but I'm going to try to make a case for one very specific part of it:
> how much is your income and how much are your current financial obligations
This doesn't work if your income doesn't show up in the government's system. For example, if your income comes from illegal activity. Crime is bad and you shouldn't do it, but crime is an economy and some people really don't have a better option. If your income comes from criminal activity, getting boxed out of the consumer financial system isn't helping you towards any avenue where crime is no longer the best option.
> This doesn't work if your income doesn't show up in the government's system. For example, if your income comes from illegal activity.
It's not a government system. Banks will typically ask for a payslip.
> For example, if your income comes from illegal activity.
You think banks are going to give you a loan if your income is from criminal activity? That's cute. Banks are required to report suspicious activity and the last thing they want is even the appearance of being involved in money laundering. It's a problem for certain professions, like sex workers (which is a perfectly legal occupation here) as they mostly get paid in cash and often deposit large amounts of it they are an obvious channel for money laundering and as such they have a hard time just getting a bank account, never mind getting a loan.
> It's not a government system. Banks will typically ask for a payslip.
I admit to misunderstanding but I fail to see how this diminishes my point.
> You think banks are going to give you a loan if your income is from criminal activity? That's cute.
That's exactly what I'm saying. The above approach systemically blackballs anyone who lacks a better avenue to a reliable income.
That's a failure that exists in both the American system and the Danish one. My point is this: In the American one, it's a byproduct of AML law, which could easily be changed to allow banks to ignore small-time cases (with conditions, of course). In the Danish system, the blocker is inbuilt - it can't be regulated away without fundamental changes to the design of the system. Adding a "proceeds from criminal activity" box doesn't work great. Ask Al Capone.
Petty criminals don't pose enough of a threat to society for it to be worthwhile to block them out of basic, low-risk financial services like checking accounts and debit-backed credit cards. Barring them from those services doesn't discourage the illegal activity. It does more to lock them into their current socioeconomic status.
Years ago I worked in the industry and I totally agree. Fair Isaac in particular has enormous power as basically the only source of models people use, and they are very opaque.
Yes and then people claim the social credit scoring system in china is a dystopian hellscape. I happen to think it’s far less dystopian that privately run financial credit reporting agencies.
Right, so as a solution to them having: too much power over our lives, being unaccountable and incompetent. Is:
Giving the backing of the state over their actions. Move from being accountable to government to _being_ the government. And the competency of giant public bureaucracies!
