First of all, let’s try to avoid American-bashing, and stay respectful to everyone.
I’ll start: for me it’s the tipping culture. Especially nowadays, with the recent post on [email protected] with the 40% tip, it just seems so weird to me to have to pay extra just so that menu prices can stay low.
The expectation of everyone having a credit card as soon as they can get one and paying everything with credit to somehow “build” credit. Sounds such a great way to get people into financial trouble at a young age.
In Germany the system is shit too. There is a private monopol company that calculates and stores a score for you. The calculation method is secret, but we know several things can lower your score, such a having too much bank accounts/credit cards, moving too often, if you ever had debts and how fast you paid them and so on. When you ask a bank for a loan, they check this score and may decline if it’s too low. There are some people who have problems getting a loan because they have no records for their score.
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Which is basically your consumer data …
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But isn’t the whole concept of having to ‘build credit’ insane? In the Netherlands we don’t have that
How else would you know a person’s credit worthiness when you are being asked to lend them a million dollars? What would you use instead?
If you have any outstanding debts, that’s recorded in a registry (BKR), so the banks won’t give you a loan (you won’t even be able to buy a phone on credit).
If you have no outstanding debts, you are not registered at BKR, so the banks will give you a loan according to their internal formulas (e.g. if you don’t have a high salary you won’t get a €1 million loan, but you might be able to get a €300.000 one).
So I guess it’s like a negative credit system: if you’re not credit-worthy, lenders will know (due to being BKR-registered), and otherwise you’re assumed to be credit-worthy (in accordance to your salary).
If we want to buy a house for example? A copy of your registry of fines where you get an entry for not paying an invoice or such, your income and your savings are taking into consideration over here.
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Or, in other words, by people who are less wealthy than you.
On the flip side, without establishing some kind of credit record, nobody will ever give you a loan for a house or even a used car.
That’s the part I don’t get at all. How come is not having any credit history a bad indicator? If anything, it should tell that the person is financially stable to afford things without needing credit.
Where I live (and I think in other European countries too, with exceptions) it works other way around. Having a clean credit record is a good thing and only if you neglect your payments you get negative marks on your record. Having any negative marks generally prevents you from taking any new loans or financing (a good thing!) but negative marks will be cleared after debts have been paid off and some time has passed.
clean history wont prevent you from getting a loan in the usa, it just prevents you from getting a big loan at a low interest rate. Smaller amounts won’t be much of a problem if its a clean. Also, bad marks are removed in time just like anywhere else.
I think the reason why clean reports may be a little bit more of an issue in the us than elsewhere is because of how easy it is to get an kind of loan or credit and how uncommon having a blank credit score can be as a result. Between student loans, credit cards, car loans (atleast cheaper loans for used cars) etc its pretty unlikely, by the time someone goes to try and take out a big loan, like say for a house, that they would have zero credit history or not have someone like a parent cosign who also has zero history (if someone cosigns it goes on both people’s credit history) And, businesses, looking for any excuse to avoid risk on an investment, would be less likely to give a big loan to someone with no history when there are so many people with good credit history to still make plenty of money.
All that said, credit cards seem quite a bit less common than they used to, especially since debit cards became a thing. Most people i know, myself included with credit cards are either for business expenses that are paid off immediately, or for the extra safety provided by the ability to charge back on purchases that debit cards don’t often provide.
I don’t disagree with you, I’m just saying how it is here and the reasons why Americans use credit cards so much.
I have major problems and concerns with how credit scores work here, as well as the mysterious and flawed algorithms that determine them. The way credit scores are calculated sometimes incentivizes bad credit behavior, like maximizing your total available credit and keeping lines of credit open even when you don’t want/need them anymore. It’s deeply flawed. You’re right about that.
However as just a matter of fact, in America at least, if you show up to your bank asking for a $500,000 USD home lone (which sadly is the average house cost where I live on the west coast), they will perceive a total lack of credit history as a big question-mark, and a sign of uncertainty and risk. I’ve known people who struggled to even open a credit account in their late 20s simply because they didn’t already have an existing credit history to point to, which goes without saying is a total catch 22.
In other words, it’s definitely a flawed system, but one that many of us have basically no choice to participate in. I have a good credit score because I have almost always paid for just about everything on my credit account, and then pay off the entire balance each month (sometimes twice per month). But like you said, a lot of people get into real problems with credit card debt because they either never learned how to responsibly use one, or they simply struggle to live within their means based on how little they make.
Consider two potential creditors:
Can you see how B is a less risky client than A? A is essentially an unknown risk, but B has demonstrated the ability to manage their debt. A could still get, for instance, a car loan, but likely not a mortgage. And B will get a lower interest rate.
Dept is fascinating, our system seems to be build around it. And still, I was raised with ‘Don’t spend money you don’t have’ which makes person A more trustworthy to me compared to person B, who seems to live a financially risky life. But of course the bank earns more with person B, paying interest. I would reward this behavior as well, but it’s not the kindest system for gullible people.
How is A an unknown? They’ve demonstrated that they don’t make a habit of spending money they don’t have, which most people would consider conservative and responsible.
I agree that credit scores are stupid, but for the purpose of playing the devil’s advocate… Person A may have just crawled out from under a rock (or their parents’ money) and knows not how to manage a credit or just thinks it’s free money. They’d still have no credit history. For risk assessments, you always take the worst case in all fields where it applies, not just financial.
On the other hand, I think that if your circumstances change and you manage to pay off a loan early, you get penalized on your credit score, cause some bank had plans for your interest for the next 30 years or something.
TBH it’s not the absolute worst way to figure out if someone is responsable enough for “big credit”, basically the industry is saying “here’s more than enough rope to hang yourself with, choose wisely.”
Of course, there is no financial or credit education provided to help with making those wise choices…