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Credit score is not a useful measure of financial health. A minimum wage worker living paycheck to paycheck but making minimums on a large credit card balance

Credit score is not a useful measure of financial health. A minimum wage worker living paycheck to paycheck but making minimums on a large credit card balance will have a better score than a retiree who's long since paid off his house and car and pays cash for entertainment and playthings.

toomuchtodo 1y ago
The minimum wage worker will not be making the minimum payment successfully on their credit card balance (bottom sixty percent of Americans cannot afford a basic quality of life [1] [2]). They likely can't produce $500 for an emergency, and use credit products with interest rates as high as ~30-35% with credit lines no larger than a few hundred or thousand dollars. The retiree you mention in your example will have an 800+ FICO credit score due to longevity of their trade lines (decades) and likely no inquiries (because they don't need to seek credit) or missed payments. Cash flow underwriting would paint this picture better [3], but is still not widely performed outside of an org containing the deposit account (internal underwriting for credit products that don't have to conform for asset backed security sales). So, credit score is a reasonable proxy at this time for household financial health (imho) [4] [5] based on research performed by the CFPB. [1] https://www.cbsnews.com/news/cost-of-living-income-quality-of-life/ https://www.cbsnews.com/news/cost-of-living-income-quality-o... [2] https://lisep.org/mql https://lisep.org/mql [3] https://fintechtakes.com/articles/2024-05-22/cash-flow-underwriting/ https://fintechtakes.com/articles/2024-05-22/cash-flow-under... [4] https://www.consumerfinance.gov/about-us/blog/new-report-explores-relationship-between-financial-well-being-contents-engagement-credit-reports/ https://www.consumerfinance.gov/about-us/blog/new-report-exp... [5] https://files.consumerfinance.gov/f/documents/cfpb_credit-karma_report_2019-08.pdf https://files.consumerfinance.gov/f/documents/cfpb_credit-ka... (day job is in finance/consumer credit)

toomuchtodo 1y ago

The minimum wage worker will not be making the minimum payment successfully on their credit card balance (bottom sixty percent of Americans cannot afford a basic quality of life [1] [2]). They likely can't produce $500 for an emergency, and use credit products with interest rates as high as ~30-35% with credit lines no larger than a few hundred or thousand dollars. The retiree you mention in your example will have an 800+ FICO credit score due to longevity of their trade lines (decades) and likely no inquiries (because they don't need to seek credit) or missed payments. Cash flow underwriting would paint this picture better [3], but is still not widely performed outside of an org containing the deposit account (internal underwriting for credit products that don't have to conform for asset backed security sales). So, credit score is a reasonable proxy at this time for household financial health (imho) [4] [5] based on research performed by the CFPB. [1] https://www.cbsnews.com/news/cost-of-living-income-quality-of-life/ https://www.cbsnews.com/news/cost-of-living-income-quality-o... [2] https://lisep.org/mql https://lisep.org/mql [3] https://fintechtakes.com/articles/2024-05-22/cash-flow-underwriting/ https://fintechtakes.com/articles/2024-05-22/cash-flow-under... [4] https://www.consumerfinance.gov/about-us/blog/new-report-explores-relationship-between-financial-well-being-contents-engagement-credit-reports/ https://www.consumerfinance.gov/about-us/blog/new-report-exp... [5] https://files.consumerfinance.gov/f/documents/cfpb_credit-karma_report_2019-08.pdf https://files.consumerfinance.gov/f/documents/cfpb_credit-ka... (day job is in finance/consumer credit)