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I don't disagree with you–but it can be frustrating to know you've improved both your responsibility and your earning power yet only be judged by the past. For

I don't disagree with you–but it can be frustrating to know you've improved both your responsibility and your earning power yet only be judged by the past. For example, I've paid cash for the last 5 cars our family has purchased over the last 6 years. Why doesn't my ability to do that apply to my credit-worthiness? Small things like that annoy me about the agencies/system. Also, the median home price where we live is $500-600K (depending on the city/neighborhood). 30% of that is quite a down-payment.

dangrossman 13y ago
> Also, the median home price where we live is $500-600K (depending on the city/neighborhood). 30% of that is quite a down-payment. You're talking about being entrusted with half a million dollars of someone else's money. That's a huge bet to make on you; it goes both ways. If you can't afford the down payment, then you can't afford to live in that neighborhood. 30% isn't an unusual downpayment, especially if you don't have perfect credit. With a smaller downpayment, the bank is in a position where you could default on the mortgage, they repossess the house, and because it's depreciated in value at all, get less money when they sell it than they paid the person who sold the house to "you" (to the bank, really) after foreclosure and closing costs.
- johnchristopher 13y ago
  Why is the house "depreciated in value at all" ? I don't understand that part.
  - dangrossman 13y ago
    You just lived through a recession in which tens of millions of homes depreciated in value during the terms of their loans. Depreciated means it lost value; the house is worth less than before. That, combined with a small downpayment, can result in a bank holding a foreclosed home which is worth less than the value of the mortgage on it.
    - johnchristopher 13y ago
      Ah, I see. I thought your explanation was more general, not specific to the current economic situation. And since I learned as a kid that a house normally only get more value over time (I live in western europe) that was confusing me. Thanks for the clarification.
      - jdbernard 13y ago
        > I learned as a kid that a house normally only get more value over time I think this is one of the reasons we got into this mess. People bought more house than they could afford thinking they would be able to sell it if they needed to and at least break even. Nobody was prepared for underwater mortgages because we all assumed houses only appreciate.
  - useful 13y ago
    all structures depreciate, eventually it will fall down. It requires maintenance to keep the same value. This is one reason most people will tell you to never buy a condo. Land is finite and does not depreciate.
    - bstpierre 13y ago
      > Land is finite and does not depreciate. The value of land can definitely depreciate. Perhaps not in [sub]urban areas so much, but in rural areas the value of land can be tied to things like timber, water, or mining. If I buy some acreage and extract timber/sand/gravel/etc, that land is going to have a lower resale value. Or maybe I buy prime farmland and then crop the soil until it is dead. Or instead of extracting stuff, I leave bad stuff behind (persistent pollution -- lead, mercury, etc). For something more [sub]urban, consider the case where a new highway is built to route traffic around a city instead of through it, and a previously viable commercial location becomes worthless because the traffic count drops to near-zero.
ams6110 13y ago
20% - 30% used to be the standard down payment for a mortgage. I'm not sure exactly when the %5%, 2%, and even no-money-down mortgages started, but they are a big part of why housing has been in such a mess the past decade. They sort of set the general expectation that you could buy a house with no personal sacrifice or investment, and thus made it easy for people to rationalize walking away when the payments became difficult to manage.
bullseye 13y ago
> For example, I've paid cash for the last 5 cars our family has purchased over the last 6 years. Why doesn't my ability to do that apply to my credit-worthiness? Because paying cash once for something is the opposite of proving credit-worthiness. You haven't proven an ability to uphold your end of a long-term agreement. If you want to improve your credit, finance those cars. Make payments for about 6 months and then pay them off. You pay a little extra in interest, but you get another credit entry which is in good standing. On an unrelated note, you can almost always negotiate a better price on your car (in the US) if you finance and then pay the loan off.
- morrad 13y ago
  There are better (less expensive) ways to build credit than car loans. While I don't remember the name, my wife and I built credit getting some sort of secured loan from our local credit union. The process was something along the lines of making an account with them, putting $X into the account, and then getting a 6 or 12 month loan from them for the same $X dollars at a really low interest rate. Overall I think we paid $30 to $50 dollars over that period in interest.
- unclebucknasty 13y ago
  >Because paying cash once for something is the opposite of proving credit-worthiness. You haven't proven an ability to uphold your end of a long-term agreement. This is absolutely true under the current system. But, I think the parent is actually questioning the rationale behind the current system. I agree to some extent. Accruing, then using significant cash-on-hand to make multiple large purchases should speak more than it currently does to the customer's financial responsibility and/or wherewithal. It's also potentially evidence of his/her earning ability. All of these should contribute more to the determination of a person's "credit-worthiness". The current system is punitive for those who generally don't like debt, but recognize its necessity for large purchases (i.e. especially for homes). Debt elimination/avoidance is a sound and oft-recommended personal financial practice, which should show sound financial judgement. Why is there a penalty for subscribing to it? Of course the credit-reporting bureaus profit tremendously by upholding the current system as it is. Their biggest customers as well as their source of information/power are the creditors themselves.
hackula1 13y ago
If a 20-30% downpayment seems completely unrealistic, then you are probably not in area that you can afford. A home is like a car, in that nobody forces you to buy the Porsche, and you can always buy something in a cheaper area. A location with a median home value of 600k is definitely in the "Porsche" category of locations. Go find yourself a Camry.
- callmeed 13y ago
  Never said it was unrealistic–just meant it wouldn't happen immediately. By the time I have it available (2-3 years), my credit score will be improved too. Also, our rent is very low here ($2K for a 4bd home on 1/3 acre in a great neighborhood). We just happen to be in an area where buying vs. renting is out of balance. And your car analogy breaks down real fast. There are many more factors which can/do prevent people from moving to other cities.
kevinpet 13y ago
So you pay cash for everything, and somehow that demonstrates your ability to responsibly use credit? Do you also assume that Mormons are experts on responsible social drinking?

dangrossman 13y ago

> Also, the median home price where we live is $500-600K (depending on the city/neighborhood). 30% of that is quite a down-payment. You're talking about being entrusted with half a million dollars of someone else's money. That's a huge bet to make on you; it goes both ways. If you can't afford the down payment, then you can't afford to live in that neighborhood. 30% isn't an unusual downpayment, especially if you don't have perfect credit. With a smaller downpayment, the bank is in a position where you could default on the mortgage, they repossess the house, and because it's depreciated in value at all, get less money when they sell it than they paid the person who sold the house to "you" (to the bank, really) after foreclosure and closing costs.

johnchristopher 13y ago
Why is the house "depreciated in value at all" ? I don't understand that part.
- dangrossman 13y ago
  You just lived through a recession in which tens of millions of homes depreciated in value during the terms of their loans. Depreciated means it lost value; the house is worth less than before. That, combined with a small downpayment, can result in a bank holding a foreclosed home which is worth less than the value of the mortgage on it.
  - johnchristopher 13y ago
    Ah, I see. I thought your explanation was more general, not specific to the current economic situation. And since I learned as a kid that a house normally only get more value over time (I live in western europe) that was confusing me. Thanks for the clarification.
    - jdbernard 13y ago
      > I learned as a kid that a house normally only get more value over time I think this is one of the reasons we got into this mess. People bought more house than they could afford thinking they would be able to sell it if they needed to and at least break even. Nobody was prepared for underwater mortgages because we all assumed houses only appreciate.
- useful 13y ago
  all structures depreciate, eventually it will fall down. It requires maintenance to keep the same value. This is one reason most people will tell you to never buy a condo. Land is finite and does not depreciate.
  - bstpierre 13y ago
    > Land is finite and does not depreciate. The value of land can definitely depreciate. Perhaps not in [sub]urban areas so much, but in rural areas the value of land can be tied to things like timber, water, or mining. If I buy some acreage and extract timber/sand/gravel/etc, that land is going to have a lower resale value. Or maybe I buy prime farmland and then crop the soil until it is dead. Or instead of extracting stuff, I leave bad stuff behind (persistent pollution -- lead, mercury, etc). For something more [sub]urban, consider the case where a new highway is built to route traffic around a city instead of through it, and a previously viable commercial location becomes worthless because the traffic count drops to near-zero.

ams6110 13y ago

20% - 30% used to be the standard down payment for a mortgage. I'm not sure exactly when the %5%, 2%, and even no-money-down mortgages started, but they are a big part of why housing has been in such a mess the past decade. They sort of set the general expectation that you could buy a house with no personal sacrifice or investment, and thus made it easy for people to rationalize walking away when the payments became difficult to manage.

bullseye 13y ago

> For example, I've paid cash for the last 5 cars our family has purchased over the last 6 years. Why doesn't my ability to do that apply to my credit-worthiness? Because paying cash once for something is the opposite of proving credit-worthiness. You haven't proven an ability to uphold your end of a long-term agreement. If you want to improve your credit, finance those cars. Make payments for about 6 months and then pay them off. You pay a little extra in interest, but you get another credit entry which is in good standing. On an unrelated note, you can almost always negotiate a better price on your car (in the US) if you finance and then pay the loan off.

morrad 13y ago
There are better (less expensive) ways to build credit than car loans. While I don't remember the name, my wife and I built credit getting some sort of secured loan from our local credit union. The process was something along the lines of making an account with them, putting $X into the account, and then getting a 6 or 12 month loan from them for the same $X dollars at a really low interest rate. Overall I think we paid $30 to $50 dollars over that period in interest.
unclebucknasty 13y ago
>Because paying cash once for something is the opposite of proving credit-worthiness. You haven't proven an ability to uphold your end of a long-term agreement. This is absolutely true under the current system. But, I think the parent is actually questioning the rationale behind the current system. I agree to some extent. Accruing, then using significant cash-on-hand to make multiple large purchases should speak more than it currently does to the customer's financial responsibility and/or wherewithal. It's also potentially evidence of his/her earning ability. All of these should contribute more to the determination of a person's "credit-worthiness". The current system is punitive for those who generally don't like debt, but recognize its necessity for large purchases (i.e. especially for homes). Debt elimination/avoidance is a sound and oft-recommended personal financial practice, which should show sound financial judgement. Why is there a penalty for subscribing to it? Of course the credit-reporting bureaus profit tremendously by upholding the current system as it is. Their biggest customers as well as their source of information/power are the creditors themselves.

hackula1 13y ago

If a 20-30% downpayment seems completely unrealistic, then you are probably not in area that you can afford. A home is like a car, in that nobody forces you to buy the Porsche, and you can always buy something in a cheaper area. A location with a median home value of 600k is definitely in the "Porsche" category of locations. Go find yourself a Camry.

callmeed 13y ago
Never said it was unrealistic–just meant it wouldn't happen immediately. By the time I have it available (2-3 years), my credit score will be improved too. Also, our rent is very low here ($2K for a 4bd home on 1/3 acre in a great neighborhood). We just happen to be in an area where buying vs. renting is out of balance. And your car analogy breaks down real fast. There are many more factors which can/do prevent people from moving to other cities.

kevinpet 13y ago

So you pay cash for everything, and somehow that demonstrates your ability to responsibly use credit? Do you also assume that Mormons are experts on responsible social drinking?