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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
by 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 agoThat'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 agoI 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-...
- secabeen 7y agoIt does, for the untreatable mental illness situation, it's called Conservatorship: https://en.wikipedia.org/wiki/Conservatorship https://en.wikipedia.org/wiki/Conservatorship
- deleted 7y ago[deleted]
- astura 7y agoSorry it wasn't clear... Because in some countries your "credit" is only the bad things (unpaid debt) whereas in America (and other places) your "credit" includes both the bad things and the good things too. So its in your best interest to add good things. In other words, you're able to prove you're conscientious to entities who will give you some benefit for being conscientious.
- SilasX 7y agoThat's just passing the buck: why does the US need that positive history first, when other countries can get by without needing that first?
- jlokier 7y agoI'm in the UK, which is part of Europe, and we do have to build credit here. Permission to rent, in the nicer places, is contingent on credit ratings, and so is the interest rate you will be charged for a mortgage, as well as getting access to one at all. So it affects access to housing, and is quite important. (Unfortunately the credit reference agencies maintain files with a lot of credit-harming errors in them. Sometimes even fictitious, unpaid/overdue transactions will appear, in fictitious credit accounts. Even obtaining a new phone contract can harm your credit rating temporarily - it affected mine a lot when I took out 3 new data SIM contracts. I think most people don't check their files, but they should, and then correct the harmful errors.) I think the housing dependency on credit rating in the UK has become considerably more onerous in recent years, since the "credit crunch". According to a bank I spoke with, it also affects whether you can be a director of a company, because banks want to know the directors of any company that holds a business account with them, and they can decline to provide account services if a director has a sufficiently poor credit record.