Without getting into any real details about US credit scores, how would you determine risk on say giving someone a car loan? You’d want to know that the person has 5 previous repossessions right? A credit score tells you that. Without some type of score (in the abstract sense), you’d have no way of determining risk.
In my country it's fairly easy; you can not default on debts, they are for life.
If you don't pay, debt goes to a specific government ministry that picks you clean (property, assets, accounts) until debt is paid off, leaving you with nothing more than enough to eat and pay rent every month (for a tiny apt).
Every time you try to take a loan or buy something on a payment plan, the seller will check with the ministry if you are registered there. You can't get anything unless paid upfront in full, no cellphone subscription, no credit cards.
Once debts are paid off, you are still in the registry for 3 years (unless you rack up more debts).
The fact that banks would like this to better determine risk, doesn’t mean a society has to allow for it. Banks could also just accept the higher risk, and work with that. For example by asking higher interest or insuring the debt. There are solutions that don’t require big invasion of privacy.
This is all true. I don’t think I’d like paying more for debt because others routinely default on theirs. I’ve always been judicious with the debt I take on, and that has benefited me by allowing me to access the cheapest credit and no-deposit utilities.
All that being said, I do appreciate that centralized scoring can go too far. And I don’t have the answer for where a line should be drawn. Or how far back in time the scoring should assess. (BTW, it’s generally 7-10 years I believe, which is pretty short)
How is auto insurance handled where you are? How would you feel about no-fault insurance rates where every driver pays the same amount regardless of risk?
Asking who to pay higher interest? Everyone? Until one bank says “you can pay less if you tell us about your past loan history”. Which 99% of people who pay their loans back are going to take.
I think the thing that most of us can't wrap their head around is the "building a credit score" part, not the credit score itself.
As in, if I never take a credit and save all my money, I don't have a good credit score, but if I spend 95% of my net income on weird stuff, but do pay my credit card bills on time I suddenly have a good credit score? As exemplified by advice I often read to route as many recurring payments as possible (including rent) through a credit card (and paying on time, ofc).
I mean, that's how it was explained to me, but happy to be proven wrong.
A large part of a credit score is determined by a track record of on time payments. You don't need to spend 95% of your net income on weird stuff to do that.
Are you sincerely confused that building a credit score requires you to actually use credit?
This is pretty inaccurate in my experience. I have always had a score above 800 and never took on heavy debt and paid of credit cards monthly.
I suspect most of the building credit Behavior comes into play when you are trying to dilute derogatory marks on your credit reputation. If you missed a $50 bill, it is better if it is one of hundreds of transactions then one of 10.
With that said, I can see the value of showing some experience of servicing debt. Imagine being a banker talking to someone asking for a large loan. Someone with a documented history of paying on time is naturally lower risk then someone with no history
You’re basically correct (although 95% of income is drastically overstated, it can be far less than that), but I don’t understand why you can’t wrap your head around that? If you’re never taking on any credit debt then of course you will have a non existent credit score. If I’m a lender, how would I possibly know you’re capable of paying back a loan without some audit trail of your past ability to do so? It seems an incredibly simple concept to understand.
