Why have a Credit Score?
Here is my question: Why must we have credit scores to determine trustworthiness?
Here is my reasons: Aside from the unapproved monitoring of personal purchasing actions and accounts- Why do we “trust” people who have gone into debt over those who have not?
I understand that good credit means you are good at getting out of debt. I have no credit, in my late 20′s and made it all the way up and through grad school without taking loans (meaning I worked my tail end off while attending school to not owe anyone money so I could graduate free and clear). So I stand with no credit history, because I don’t own a credit card, can afford all my purchases or save up for them, and work hard to not go into debt.
So why is it that in the U.S. we value people with who have consistently gone into debt over those who haven’t? Who profits from this “credit” system, us (the people) or the rich capitalist? Any ideas or suggestions for change?
Thanks so much for the answers so far. They have been really insightful and helpful.
Additionally, I know that people suffering from identity theft can freeze their credit accounts for free (as well as residents of California for $10 X the 3.) What are the advantages and disadvantages of doing this? What happens if more people froze their accounts?
(I understand its “the real world” the way things are currently… but then again years ago credit scoring isn’t what it is now. So I want to expand our thinking beyond looking at the current situation as static and set in stone.)
Many things improve over time, do you see credit reports evolving to adapt to their current limitations? and how?
Rachel
Milton
Welcome to the real world.
Brent
First and foremost-the monitoring is not “unapproved” you have to sign a release (or read the fine print, some places require you to sign one to NOT report/monitor)
Good credit doesn’t necissarily mean that you are good at getting out of debt, it means that you are good at managing your debt to income ratio. Your credit report shows appx how much you make, how much you have available to spend (on revolving accounts like credit cards or store accounts) and how much and how often you pay those accounts. This helps companies to determine whether you are stable enough or worth the risk of giving credit to. A car dealer isn’t going to give you a car with a payment of $500/month if it shows that you only make $600/month and have $5000 worth of bills due on revolving accounts. The credit score is to help retailers and banks determine what risk level you are and whether or not to approve you and at what rate.
You can have an excellent credit score by getting a credit card, and paying it off every month. This shows that you are responsible enough to NOT go into debt.
Brian
You have a valid complaint , and as a loan officer I have had a similar viewpoint in a number of cases. It makes no sense for someone to be penalized for paying cash up front Unfortunately, the credit systems today often have no option for “common sense ” to be part of the approval equation. If you find a lender who will listen, you may be able to get a credit card to begin building your credit rating. If they have no authority because you have no existing credit , they may ask if you have an amount of cash/term deposit which can be “held” as security for your credit card . This is likely the easiest way around the problem. The reasoning behind the credit score is proof of past credit dealings and an indication of future behaviours, but as you are aware, the systems do not recognize paying as you go as being the excellent money management skill that it truly is, especially these days. While we may not agree with the way things are, it is one of those things that we have to “go along with ” if we want to be able to borrow funds in the future for a house purchase or other large ticket items that saving for is not a realistic option.
Mitchell
Strangely enough it is not about borrowing as much as it is about showing the lender that you have a record of consistently paying back on time. When you have no credit or debt you are not making payments and therefore there is no record about how consistent you are at making payments.
Start with a Sears card and a Gasoline Company card and keep making the payments on time. Go to your bank where you have your savings and get a Visa or Mastercard from that bank and buy things you need and make the payments consistently.
It may not make sense but the system is there and it works and you can’t lick em so you’d better join em.
Dora
It has nothing to do with going into debt, it has everything to do with how you repay that debt.
A credit report is like a report card in school, it shows how responsible you are with your debts and how you manage money.
This is required for the lenders to make a judgment call when someone request a loan.
They have to see if you paid your past debts and if you paid them as agreed. By being able to see this on your report, it allows them to determine risk which is what all loan approvals are based on.
I understand your frustration, I work in finance and have to deal with this logic every day, but that’s just the way it is. Like one of the other posters said, “Welcome to the real world”.
Dana
Well if you pay for everything in cash then you should not need to worry about your credit report and/or your credit score because you can afford to pay everything in cash and you have no need to borrow money.
Credit and credit scores are around because most of the population does need to borrow money to get a car, to go to school, to buy a home, to buy necessities that they need now but may not necessarily be able to afford now.
If you are looking to buy something using credit, such as a home or a car, then you must show proof that you know and understand how to handle borrowing money before a lender is willing to lend you tens and hundreds of thousands of dollars. Without any type of credit history a lender has no way to know how responsible you will be with borrowing money. However, if you have shown a very good and responsible history of borrowing money in the past you are a good risk. With no history you are a much higher risk.
If you ever intend on borrowing money from a lender (such as for a home or car), then it is important for you to establish a credit history, even a simple one will do. Take out a few credit cards, use them very sparingly for things you would normally pay cash for and then pay them off each month you use them. This is responsible credit usage and demonstrates a good history to a lender making you a much better risk to them. This will help you to qualify for a loan for something that you can not afford to pay in cash.