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Can someone explain to me why America has this strange system of “building credit” while other countries don’t really seem to? In my country there are agencies

• devoply 7y ago
  It's likely just a system (credit score) invented to get as many people using credit as possible. But there is a credit score and that is a result of making payments on time to many different sources of loan and paying them on time over a long period of time. But you don't actually have to keep a balance you can simply pay them off all the time. I use it to avoid paying for using my debit card transactions (which are limited for the free account that I hold). As a result probably all of my purchase history is sold to other companies all the time.
  • berdon 7y ago
    Agreed. The simplest answer is that it's intended to maximize the number of financially irresponsible debtors to maximize interest paid in.
• vaseem 7y ago
  For mortgages what you stated is still the process. It gets expensive to do through investigation and review all documents, pay slips and bank account for something as trivial as say 'buying a phone' or 'getting internet service'. Credit score has its place there
• pxeboot 7y ago
  To make it worse, no credit history equals a score of zero, so it can be worse than just having bad credit.
  • conanbatt 7y ago
    Depends on the use-case. All foreigners that migrate for a job to the us have no credit history, and no significant problems finding apartments and opening bank accounts.
    • deleted 7y ago
      [deleted]
    • totaldude87 7y ago
      And has to pay hefty security deposits, each time when they switch (without a proper credit score)
      • conanbatt 7y ago
        Might depend on where but I've had no different treatment from my no-score days to my now healthy score.
    • Cyph0n 7y ago
      > and no significant problems finding apartments and opening bank accounts Firstly, opening a bank account almost never requires a credit check. Think about it: what risk is the bank taking on by giving you an account with nothing in it? Secondly, renting an apartment typically involves a credit check in my experience. I had my father co-sign my first lease to avoid the security deposit (~$1000, 1 month of rent). There is also a separate renter's score (?) that evaluates how "good" of a renter you are in general.
      • brianwawok 7y ago
        Bounced checks, or overstrung debit cards. I think no history you are fine to open a bank. But I think if you have bad credit history (like previously bounced checks), you won't get approval for a checking account - or get a very limited account.
• sl1ck731 7y ago
  The answer is probably that it is a service that banks and everyone else who uses the scores has decided is worth paying for. If finance institutions wanted to do all the legwork or just decided the credit score was useless they would probably just not request scores from them. Just my thoughts though, no source to back it up. I'm not aware of any mechanism that requires organizations to use the credit scoring companies.
• Spooky23 7y ago
  Because the score correlates highly to payment/non-payment. If you never borrowed anything before, a lender doesn't know if you are capable of getting and responding to mail, writing a check, arranging electronic payment, etc. A surprisingly high number of people are unable of handing these basic tasks.
• Causality1 7y ago
  Indeed. I ran into problems for years because I'd simply never been in debt and saw no value in using a credit card over a debit card.
  • asdff 7y ago
    I hope you do now, their best feature is they are a proxy for your bank account.
• jdietrich 7y ago
  A record of successfully repaying debt is highly relevant to whether you're likely to repay your debt in future. Credit risk is only partly about affordability; many people who can afford to reliably repay their debts still fail to do so, for a variety of reasons. It doesn't really matter to lenders whether you "game" the system; if you're sufficiently organised, responsible and financially stable to take out and repay debts solely for the purpose of improving your credit history, then you're probably a good person to lend to. Americans tend to use a lot of consumer credit, so not having a credit card, a cellphone contract or a car loan makes you anomalous. I don't know what country you're in, but here in the UK "building credit" is very much a thing; I'd be very surprised if it had no impact whatsoever on your creditworthiness in your country. https://www.moneysavingexpert.com/loans/credit-rating-credit-score/ https://www.moneysavingexpert.com/loans/credit-rating-credit...
  • inetknght 7y ago
    > A record of successfully repaying debt is highly relevant to whether you're likely to repay your debt in future. Credit risk is only partly about affordability; many people who can afford to reliably repay their debts still fail to do so, for a variety of reasons. I'm not convinced. We have people like Donald Trump in our presidency who is arguably one of the worst offenders of non-payment of debts. We have the 2008 financial crisis where people were given loans regardless of payment history -- and that debt was then loaded up and sold to, effectively, shareholders. We have student loans which are frequently forgiven.
    • gizmo686 7y ago
      Whats your point. Trump has a history of not paying debts, and can't get loans without going to questionable sources. People being given loans without due respect to there payment history led to an economic crises when they failed to pay them back at the expectex rate. Student loans, again given without normal consideration, have a higher rate of default and forgivenes.
      • kryogen1c 7y ago
• bdcravens 7y ago
  I suspect it's because Americans live far more leveraged lives? We finance everything: our phones, our cars, our lawn mowers, our education. The average student loan debt is about $35k. The average household has over $20k in non-mortgage debt. The average credit card has a balance of over $6k; the average retail card over $1800. The average car payment is $400 (used) and $550 (new). You typically walk into a car dealership and drive away in a few hours with a car worth tens of thousands of dollars. And these numbers are increasing every year. With so much hunger for debt, manually underwriting isn't practical for the smallest debts. (at least not based on most businesses like car dealerships who depend on volume and spontaneity) https://www.fool.com/the-ascent/credit-cards/articles/the-average-americans-debt-balances-anything-look/ https://www.fool.com/the-ascent/credit-cards/articles/the-av... https://www.usatoday.com/story/money/cars/2019/03/01/care-payments/3001818002/ https://www.usatoday.com/story/money/cars/2019/03/01/care-pa...
  • Havoc 7y ago
    >The average credit card has a balance of over $6k; Wow. That’s insane for an average.
    • lotsofpulp 7y ago
      It’s a meaningless metric, as described. I have balances in the tens of thousands on many credit cards, but they’re always paid before interest applies. It’s just an interest free loan for me that offers cash back, ability to dispute payments, and other perks. What would be interesting is median and mean average of interest accruing credit card debt.
      • danans 7y ago
        That $6K is the average balance carried forward from one month to the next month (AKA revolving balance), not the balance paid in full [1], so actually its as insane as the parent thought, especially of the median is much higher. 1. https://www.nerdwallet.com/blog/average-credit-card-debt-household/ https://www.nerdwallet.com/blog/average-credit-card-debt-hou...
• KallDrexx 7y ago
  When I lived in Australia for a short period I couldn't get a credit card without a small credit limit due to not having any credit history in Australia (my US credit didn't matter). So it's definitely not just the US.
• delinka 7y ago
  All the sibling answers are pretty much spot on except for one thing: you're building your credit score; you're setting a track record for your ability to repay debt. Certainly, something similar exists in your neighborhood/region/country. Otherwise, how would anyone know that they'll ever get their money back from you? The major thing to note here in the US is there are three 'big' companies that track this information about individuals. And (now) there's a fairly standardized method for calculating your score, and that score affects A) whether you can borrow and B) the interest rate on the borrowed money.
  • Jolter 7y ago
    There is no such system that I'm aware of here in Sweden, at least. If you defaulted on a loan payment before, and it was sent to a collection agency, that's tracked. But that's it.
    • delinka 7y ago
      Tracked by whom? Sounds to me what you have is a system that assumes you'll be reliable and reports negatively when you're not. That's fine. But it's still a system that tracks that your ability to handle debt.
      • Jolter 7y ago
        Defaults are reported on request by the national debt collection authority.
        • kazen44 7y ago
          this system is nearly the same in the Netherlands.
    • astura 7y ago
      That's still a credit tracking system, it just tracks negative activities instead of both negative and positive activities.
    • 7y ago
• mabbo 7y ago
  I believe it has to do with how much Americans tend to borrow, but I'm not sure which is cause and which is effect. Do Americans borrow so much money that they need additional proof that they can pay it back (via credit ratings), OR, do Americans get the ability to borrow more because there are credit ratings systems to help lenders feel safer loaning money? Probably somewhere in the middle.
• cameronbrown 7y ago
  It's very much a thing in the UK. One of the (unofficial) minor selling points for young people getting a phone contract is being able to start building a little credit.
• kemiller2002 7y ago
  Essentially, the credit score agencies came up with a reason they are needed. In the past, it was at the discretion of the bank manager on whether or not to approve a loan. The bank manager's job was to know people who banked there, and what type of person they were, upstanding, shady, etc. Credit scores removed that risk from the bank manager's job, so large banks loved the idea. Now, loans get approved because of some score, and it's the same across all loans for a bank. You don't have the possibility of some employee just approving loans, and making huge mistakes about who to lend to. They also don't need bank managers like they did before, so they can also cut back their responsibilities...and pay. The whole credit score is actually a really oppressive tool against the poor, and that's why everyone is concerned about it. It affects almost everything you do. Need a car, credit card, etc. Yep, it determines if you get a loan, and how much interest you are going to pay. Guess who gets lower rates, people with higher scores who probably make more money, so they pay their bills easily. It gets worse. The other thing that it affects....is employment. Employers are allowed to pull someone's credit score, when they apply for a job. A number of places equate low scores with irresponsibility and a larger chance of stealing, and so they don't hire people below a certain credit score. Does this make sense? Not really, but the credit score companies make it sound really good. It's a broken system that is heavily biased against certain classes of people.
  • dahdum 7y ago
    I think relying on the discretion of a bank manager / individuals is apt to be far more biased and unfair than credit score is. I do agree it's kind of scary how far and wide these scores affect you.
• astura 7y ago
  Credit activity is a way to see how conscientious someone is. By knowing who is paying back their loans and not running up their credit cards, they know who is conscientious, therefore its useful. Good landlords want to rent to conscientious people so they pay their rent on time and don't trash the place. Insurance companies want to give discounts to conscientious people because they are less likely to make a claim. Cable companies are lending you hundreds of dollars in equipment and give you a service before you're billed, so they want you to be conscientious enough to take care of their equipment and pay you bill. So they all want to see your credit score and if you have bad credit, then you are denied or you have to pay extra or pay a large deposit. Because lenders have a quick reliable way to tell who is likely to pay them back and who isn't then they can offer very low interest rates to the good borrowers. Credit scores are not "arbitrary," they didn't materialize out of nowhere, actuaries spent lots of time making sure that they measure what they are designed to measure, which is a probability that you're going to miss a payment in the next 24 months. The fact its "gameable" is completely irrelevant if it still measures what the lender wants it to measure. The system prevails simply because it works on a large scale, even though a few individuals are left behind. People who have no credit at all can usually get a mortgage with manual underwriting (according to Dave Ramsey at least). If they only knew when someone didn't pay their debts rather than knowing when someone both did and didn't pay their debts, then we wouldn't have access to the same sorts of financial products at the same rates.
  • SilasX 7y ago
    That's all true, but it's not addressing the parent's question of why Americans have to artificially "build credit" while Europeans don't. Presumably all that applies in Europe and yet they don't have to jump through the same hoops.
    • kazen44 7y ago
      I think the major difference between the US and european countries in this regard is due to role of the goverment in society. A good example is "financiele curatele"[0]. This is a system where people (usually after either massive debt isssues or other issues which result in "mentorschap"[0]) lose their right to make their own financial decisions, and a curator handles the finances for said person until either the debt is repayed or indefinitely (the latter usually happens with untreatable mental illness). I highly doubt suchs a system exists in the US. [0] https://www.rijksoverheid.nl/onderwerpen/curatele-bewind-en-mentorschap/vraag-en-antwoord/verschillen-curatele-beschermingsbewind-en-mentorschap https://www.rijksoverheid.nl/onderwerpen/curatele-bewind-en-...
• deleted 7y ago
  [deleted]
• apeace 7y ago
  I assume that it is just a money-making scheme and serves no actual, logical purpose. I had bad credit a couple years ago because I'd never had a credit card or a loan. I decided to fix it by getting a card much like this Amazon one. I attached it to my Netflix account, turned on autopay, and forgot all about it. A few months later my credit score had skyrocketed from the mid 500's to the mid 700's. Nothing about my income or my job stability changed in those few months. Nothing about my spending habits changed. The only thing that changed was instead of paying $9 to Netflix via my debit card, I paid via my credit card. But this is an advantageous situation for them because they have multiple avenues to extract money. Miss a payment? Late fee. Don't pay the whole thing? Interest. Don't read every document you get in the mail? Here's a new annual fee. I'm in a funny situation now because my score is looking pretty good, but all of the score tracking companies tell me the best way to continue improving is by getting more credit cards. How convenient. Edit: Spelling
  • cptskippy 7y ago
    It is both a money making scheme and it does serve a logical purpose. You might have phone service for 20 years, pay each month by check, and never miss a payment. That will never show up on your Credit Report. But if you miss one payment, the phone company will gladly report you, regardless of the reason, to credit reporting agencies. Financial Institutions however do report to credit reporting agencies regularly regardless of whether it's a loan or a credit card. Having nothing on your credit report isn't necessarily a bad thing, but having a record of making monthly payments is even better. A loan costs money, in the form of interest, but a credit card doesn't necessarily cost you anything. So the theory is that you can acquire a credit card with little or no credit history, and demonstrate your ability to pay off a monthly balance and the credit card company will report that activity.
    • fjsolwmv 7y ago
      That's not true. Post-paid subscription accounts are generally reported as open credit accounts, since they are.
      • 7y ago
• cptskippy 7y ago
  > In my country there are agencies that track, for example, the fact that you had a debt collector called on you That's pretty much how US credit agencies work. How does your system differentiate between someone who pays their debts on time and someone who has never had a debt? In the US, the credit reporting agencies fulfill that role by receiving record of debt repayment from financial institutions.
  • FireBeyond 7y ago
    There's more to it than that though. Balances carried, utilization ratios, etc., all manner of metrics that are about how good a credit _consumer_ you are (i.e. profitability), not just credit risk.
• justinhj 7y ago
  Canada has it too.
• ScoutOrgo 7y ago
  It's more data for making better predictions on default. Better predictions = better returns, kinda like the stock market.
• prostoalex 7y ago
  In exchange US consumers have access to a larger variety of loans. E.g., mortgages that require little to no down payment, car loans at 0% APR.
• 92543927 7y ago
  Capitalism. America is addicted to credit. Hook 'em while they are young and financially dependant. You are either a producer or a consumer. The power is with the producers. The market decides on the winning company, until the other companies catch up with competing offers ("the first hit is free!"). Credit card companies make money from transactions and from people going late, but still paying up. You can get them to pay up, by threatening to nuke their credit score (this threat becomes stronger as more producers join in on this Moloch). You can get them to spend more by easing the process and offering cashbacks (which is like offering complementary bread in a restaurant and adding 10% to all prices). It is not what consumers want, but it is what they "deserve". Producers get rich when middle- and low-class families don't have any money saved up to replace the broken fridge, so they have to rely on even more credit, forever casting them into financial serfdom. Consumers with credit card debt have zero leverage. Consumers who never default/go late, don't care, or turn their craving addiction into support of the system (nobody wants to admit that they, or the people they care about, are getting played a fool). Removing these bizarre credit building plays, requires a change in law, a huge credit crunch/economy crash, or a cultural change. My money is on the economy crash. However, the entire credit building system proved futile during the home loan crash, so I am not holding my breath. After all, America is still a first-world country where contracting cancer can bankrupt you, while producers keep dumping toxins in the water and get off scot-free. It is ruthless. But you too can prove you are a good consumer, by building up your "social credit" score, starting with your teens.
• koala_man 7y ago
  Lack of socialism, I think. In Norway, I believe a bank is legally required to offer you a detailed, reasonable rationale if you're denied for a loan. This is to empower the consumer to fix the situation, and to avoid unfair discrimination. This means that the bank can't reject your loan simply for being your first one, or because some black-box AI said no. Essentially you're considered trustworthy until proven otherwise. Meanwhile, an American bank can probably tell you to get stuffed for any or no reason, meaning that the onus is on you to prove that giving you a loan is in their best interest: i.e. you have to build credit.
  • CerebralCerb 7y ago
    Norwegian who work in finance here. I doubt socialism is the cause. We have different financial regulations here, and I often hear Norwegian regulations are far more friendly to banks than across the pond. It would surprise me greatly if an American bank was allowed to make arbitrary loan decisions. I am only familiar with the Norwegian financial system, but here it is a given that every single loan application that the bank either approves or rejects can stand up to scrutiny. They frequently have to in the case of collection cases (I.E determine if the bank had sufficient information to determine that a debtor could reasonably be expected to repay the debt they were issued).
• jmartrican 7y ago
  WHo would you rather give a $250k loan to? a) Person who makes $100k salary and never had a loan taken out in their name. b) Person who makes $100k and has 10 year history of paying off over $50k in accumulated loans.
  • esoterica 7y ago
    You're presenting that as a rhetorical question with an "obvious" answer, but it's not obvious to me at all that the latter person is clearly a lower credit risk. Being financially stable enough that you never need to borrow any money seems like as much a positive indicator of creditworthiness as a history of paying off loans in time. I think you're bringing very US-centric prejudices to the table. In many countries there is no such thing as a credit score and having no credit history is considered equivalent to having a history of on-time payments. As long as you don't have any delinquent payments you're good. So clearly the financial institutions in these countries agree with my assessment.
  • maxxxxx 7y ago
    Personally I would think that person a) generally thinks more about money management but in the end both are probably equal. I would probably only look at defaults.
• jjtheblunt 7y ago
  > Why would banks want to trust ... It might be that the 3-way monopoly lobbied (bribed lawmakers) into legislating their business model as what is required. I'm American and it's very much reviled, and very inadequate. I believe Intuit has been looking at alternative credit scoring though don't recall where I read that.
• Ayesh 7y ago
  Credit score system the Americans apparently have to "build" isn't used elsewhere, as far as I know. But may countries have so sort of tracking and rating system to evaluate applicants for bank loans and credit cards. In my country, all negative activities are recorded, and can hinder your ability to obtain a loan or a credit card in the future. Banks and lenders can access this data, but not the landlords and the rest as you'd see in America.