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So do you have a suggestion for a system that works better, or do you prefer banks lend the money from your savings account without any sort of evaluation of ho

So do you have a suggestion for a system that works better, or do you prefer banks lend the money from your savings account without any sort of evaluation of how likely it is to be paid back?

swalberg 10y ago
I don't think the credit score itself is the problem, it's that it's the only thing banks use. There is no discretion for cases where the mode doesn't have enough information. As one example that has affected me, I moved to the US a year ago. Go to buy a used car last month with bank statements showing a good salary and enough cash to buy the vehicle outright, a check for 1/3 of the car price, and phone numbers of my employer and landlord. All the banks the finance department contacted automatically denied me without looking at the stuff I brought. I went to my local bank branch thinking a human might help. I got automatically denied, the manager tried to escalate given the information I provided, but I was still denied. In the end my loan was through the car manufacturer at a fairly high rate. I realize I am fortunate in that I can afford to take a crappy loan solely to build a credit history and play this silly game. But the way the model is used treats people who are new to obtaining US credit and people who have used credit terribly virtually identically.
- adrianmacneil 10y ago
  The problem is of course that these decisions have to be made consistently across the country, and the banks don't want to try on the "gut feel" of some random bank manager. Of course the system/criteria could be improved, but wanting consistency is not surprising. Anyway, I had a similar issue with car loans when moving to the US. I've since realized that it's pretty trivial to increase your credit score if you pay a small amount of attention to it. Simply sign up for credit karma, get a few no annul fee credit cards, and put a small purchase on them every few months so that they don't get closed due to inactivity. Within 12 months your credit score will be stellar.
- tacostakohashi 10y ago
  It's a blessing and a curse. Yes, if you've recently moved to the U.S., then you are screwed for your first year or two - need to get a secured credit card, and everything will be a hassle without credit history. Nobody will care about your salary, bank statements, assets or anything. But then, after 3-4 years, it's pretty damn convenient not needing to mess around with lengthy applications for credit (except for possibly on a mortgage), and having a credit reputation that's completely portable across providers. It pretty much makes sense that newly arrived residents are a corner case that isn't worth worrying about too much for the banks and credit reporting agencies - at any given time, the number of residents who have been here for less than, say, 2 years is going to be a pretty small, somewhat risky part of the market (less assets in the country, more likely to leave).
apatters 10y ago
The banks have a profit motive for assessing credit risk accurately. They are the ones who make money if this is done right. So why don't the banks pay for it? Why are we subsidizing the banks' business model by paying for credit reports at all? I don't have to pay if I want to receive more than one bank account statement per year, and bank accounts are another product the bank uses to make money off of me, just like loans.
- tacostakohashi 10y ago
  You also have a profit motive for having your credit risk assessed accurately - you get credit, at a better interest rate. The banks do pay for it - they have to pay a fee do get your credit report.
- kd0amg 10y ago
  The banks have a profit motive for assessing credit risk accurately. They have a clear incentive to not underestimate prospective borrowers' credit risk (or they'll lose more in defaults than they gain in interest), but the only incentive to not overestimate someone's credit risk is that someone else might offer a loan on better terms. Even if they are aware of flaws in their assessment process that overestimate a borrower's risk, they probably feel safe in the knowledge that everyone else is using that same process and will overestimate risk in the same way. A more accurate credit assessor could profit from this situation ("get your credit reports from us, and you can undercut lenders who rely on the big three"), but the barrier to entry is rather high.

So do you have a suggestion for a system that works better, or do you prefer banks lend the money from your savings account without any sort of evaluation of how likely it is to be paid back?

swalberg 10y ago

I don't think the credit score itself is the problem, it's that it's the only thing banks use. There is no discretion for cases where the mode doesn't have enough information. As one example that has affected me, I moved to the US a year ago. Go to buy a used car last month with bank statements showing a good salary and enough cash to buy the vehicle outright, a check for 1/3 of the car price, and phone numbers of my employer and landlord. All the banks the finance department contacted automatically denied me without looking at the stuff I brought. I went to my local bank branch thinking a human might help. I got automatically denied, the manager tried to escalate given the information I provided, but I was still denied. In the end my loan was through the car manufacturer at a fairly high rate. I realize I am fortunate in that I can afford to take a crappy loan solely to build a credit history and play this silly game. But the way the model is used treats people who are new to obtaining US credit and people who have used credit terribly virtually identically.

adrianmacneil 10y ago
The problem is of course that these decisions have to be made consistently across the country, and the banks don't want to try on the "gut feel" of some random bank manager. Of course the system/criteria could be improved, but wanting consistency is not surprising. Anyway, I had a similar issue with car loans when moving to the US. I've since realized that it's pretty trivial to increase your credit score if you pay a small amount of attention to it. Simply sign up for credit karma, get a few no annul fee credit cards, and put a small purchase on them every few months so that they don't get closed due to inactivity. Within 12 months your credit score will be stellar.
tacostakohashi 10y ago
It's a blessing and a curse. Yes, if you've recently moved to the U.S., then you are screwed for your first year or two - need to get a secured credit card, and everything will be a hassle without credit history. Nobody will care about your salary, bank statements, assets or anything. But then, after 3-4 years, it's pretty damn convenient not needing to mess around with lengthy applications for credit (except for possibly on a mortgage), and having a credit reputation that's completely portable across providers. It pretty much makes sense that newly arrived residents are a corner case that isn't worth worrying about too much for the banks and credit reporting agencies - at any given time, the number of residents who have been here for less than, say, 2 years is going to be a pretty small, somewhat risky part of the market (less assets in the country, more likely to leave).

apatters 10y ago

The banks have a profit motive for assessing credit risk accurately. They are the ones who make money if this is done right. So why don't the banks pay for it? Why are we subsidizing the banks' business model by paying for credit reports at all? I don't have to pay if I want to receive more than one bank account statement per year, and bank accounts are another product the bank uses to make money off of me, just like loans.

tacostakohashi 10y ago
You also have a profit motive for having your credit risk assessed accurately - you get credit, at a better interest rate. The banks do pay for it - they have to pay a fee do get your credit report.
kd0amg 10y ago
The banks have a profit motive for assessing credit risk accurately. They have a clear incentive to not underestimate prospective borrowers' credit risk (or they'll lose more in defaults than they gain in interest), but the only incentive to not overestimate someone's credit risk is that someone else might offer a loan on better terms. Even if they are aware of flaws in their assessment process that overestimate a borrower's risk, they probably feel safe in the knowledge that everyone else is using that same process and will overestimate risk in the same way. A more accurate credit assessor could profit from this situation ("get your credit reports from us, and you can undercut lenders who rely on the big three"), but the barrier to entry is rather high.