The current oligopoly of the big three credit bureaus is a travesty and needs substantial reform.
That being said, abolishing the concept of a consumer credit report entirely is a terrible idea. It is a fact that different people simply present different risks to a lender in their likelihood of default. Having actual data about a person's previous repayment history is extremely predictive of their future default probability (with proper ML applied).
If you remove the ability to use data about that actual person's previous behavior then instead lenders will simply not provide credit or financial services to large proportions of the population whom might be credit worthy as they would be unable to determine if they are creditworthy.
Again, I'm not arguing for the status quo. A lot of reform is needed. But to ignore the reality of how credit underwriting works is foolish. One of the reasons that many developing countries don't have financial services for their populations to access debt is because they don't have sufficient data to do credit underwriting.
And debt is a critical tool to enable investment in the present. Used wisely, debt enables a person to borrow from the future to invest in the present, e.g. buying a car so they can commute to a nearby city and earn a higher salary.
>That being said, abolishing the concept of a consumer credit report entirely is a terrible idea. It is a fact that different people simply present different risks to a lender in their likelihood of default.
And any bank will ascertain this from their forms when applying for a loan well before they do any kind of credit check on you.
Also, YOU should control your credit history. You can give it to a lender if you wish to prove your credit worthiness. They shouldn't be allowed to give it to anyone else. Organizations should not be allowed to track it unsolicited.
Credit scores were invented in the 1950s. I’d estimate that the US financial system has improved substantially since then, in both absolute and relative terms.
“In 1956, engineer Bill Fair teamed up with mathematician Earl Isaac to create Fair, Isaac and Company, with the goal of creating a standardized, impartial credit scoring system. Within two years, they had begun selling their first credit scoring system.”
You might recognize the names Fair and Isaac as the F and I in FICO.
Yes, but probably by being much more conservative and relying on the branch managers to have a close working relationship, or long standing banking relationship with the people seeking credit.
When that gets more automated - i.e. giving credit to somebody you've never met, then a centralized automated system for verifying trustworthiness is also needed to compensate.
It may even have the net effect of allowing some people to get credit that never could before, so swings and roundabouts I guess.
Bank of America was founded in 1904 -- well before credit scores became a thing -- to provide banking services to Italian-Americans, who could not usually obtain service from other banks due to ethnic discrimination.
It's also worth noting that banks couldn't operate across state lines until sometime in the 80s, so it wasn't unusual to see a lot of different smaller banks.
When does that ever happen? Lending and borrowing are always at the root of every economic crisis. National debt of countries are already astronomically large and will only keep growing.
Just abolish credit as well. If it means the economy will grow slower, so be it.
>If it means the economy will grow slower, so be it.
This is easy for someone to say who already lives a comfortable life.
Credit is simply a more efficient use of wealth. Without credit, money stored is money that is unused, and thus money denied to everyone else. Everyone is poorer as a result because you have millions of people willing to exchange their goods and services but are blocked because they lack a medium of exchange that is being hoarded by the wealthy.
And with credit, money lent out is money that doesn't actually exist until made real by repayment which must come from extracting value from this planet at ever increasing unsustainable rates, and there's always the risk it won't ever be realized at all in case of defaults. Credit creates money out of nowhere, effectively imposing a tax on everyone and making them poorer so that banks can extract profits. The massive amounts of debt people go into effectively enslaves them forever. Nowhere is this clearer than the student loans scam which not only lures unsuspecting victims into signing up for hundreds of thousands of dollars in debt they might not ever be able to pay off but also drives up the price of tuition and lowers academic integrity precisely because it's trillions of easy government money being injected into the economy.
Efficient use of capital? That's exactly what the banks and investment firms said about stuff like highly leveraged derivatives and the CDOs and all the stuff that caused the 2008 crisis. Bad loans was literally the source of it all. We all know who paid the price for all that and who got to keep their fortunes.
Who said anything about stopping the economy? It will keep going just fine.
I am a third worlder, by the way. My father taught me not to be indebted to anyone, a principle he himself holds to this day and a major reason for whatever prosperity my family managed to achieve.
Do you think we can remove all debt without stopping the economy? That’s simply not how business works.
IOU’s are the oil that grease the economic machine.
Personal debt, when used wisely, can supercharge a life. Buying that first car, a house, going to uni. It can change the trajectory of the person for the better. Debt-fueled investments like startups and property improvements are another example.
How could it not grease the economy? It's literally money conjured up from thin air. Would be weird if it didn't.
It's an illusion. Until loans get repaid they're just inflating the money supply. Can't get a job after college in order to pay $200k in student loans? Lost the job? People literally end up homeless or worse.
That's like saying gambling on futures with 100x leverage can supercharge a life. Yeah, I'll get rich alright if the market moves favorably to my position. Alternatively I'll get liquidated and lose everything.
Debt is necessary to invest if you don’t have sufficient savings. To say that we can do away with debt is the opinion of someone who both:
- already has a good stash of resources, and
- is incapable of seeing the point of view of a poor person.
Also, all debt is very much not magic money. Most debt represents very real, hard value. Businesses routinely provide goods and services to each other with 90 or even 180 days to pay.
You’re confusing all debt with speculation and irresponsible borrowing.
If some Americans want to borrow $200k to study an arts degree, does that mean all debt is evil?
If somebody somewhere overeats, does this mean humanity should swear off calories?
> Debt is necessary to invest if you don’t have sufficient savings.
If you don't have savings, you accumulate. Much easier to do without a mountain of debt weighing you down. Seriously thought that was the accepted wisdom, especially if you're poor. Apparently not.
> Also, all debt is very much not magic money. Most debt represents very real, hard value. Businesses routinely provide goods and services to each other with 90 or even 180 days to pay.
And what happens when one of those persons or businesses goes bankrupt? All that very real, hard value just disappears. It goes away. Doesn't get paid. Defaults.
> You’re confusing all debt with speculation and irresponsible borrowing.
If you go into debt, you are speculating. That's a fact. You're betting that you're going to be able to pay later. Whoever is extending credit to you is taking a risk. Obviously that's a calculated gamble since any number of things could happen that make it impossible for you to pay. Absolutely no confusion here.
>And with credit, money lent out is money that doesn't actually exist until made real by repayment which must come from extracting value from this planet at ever increasing unsustainable rates.
You couldn't be more wrong here. Credit creates new money. The money doesn't get destroyed again until either the credit gets paid off or the lender defaults.
The Earth's resources don't magically spring into the air when someone takes a loan. If consumption is indeed unsustainable, it's because that's what people want. Industrialization is what's destroying the earth, people who lived in countries with bad economics like the Soviet Union wanted to industrialize just as much as capitalist nations, if not more so. They drained half the Aral Sea just to provide their textile factories with cotton. It just happened that they were so bad at industrializing that they polluted and consumed less. People caring about the environment is only possible in world with enough surplus to worry about it.
>Credit creates money out of nowhere, effectively imposing a tax on everyone and making them poorer so that banks can extract profits
Again, complete nonsense. Alice takes a loan for Bob to build a home. The value of the money created with the loan comes from the new home that Bob built. Banks aren't extracting profits from diluted money, they get paid for providing financial services. Sometimes, they offer financial services for bullshit, but just means that the government should implement better policy.
> You couldn't be more wrong here. Credit creates new money. The money doesn't get destroyed again until either the credit gets paid off or the lender defaults.
That is exactly what I said. This new money doesn't actually exist. It's backed by nothing until someone creates real value and repays the loan.
> The Earth's resources don't magically spring into the air when someone takes a loan.
Of course not. People work to extract as much value as possible. Exponential growth.
> If consumption is indeed unsustainable, it's because that's what people want.
Who doesn't want to grow expontentially? My whole point is it's not sustainable.
> Again, complete nonsense. Alice takes a loan for Bob to build a home. The value of the money created with the loan comes from the new home that Bob built. Banks aren't extracting profits from diluted money, they get paid for providing financial services.
Alice takes out a loan at the bank. Alice pays Bob for services. Bob deposits money at bank. That same money is loaned out again. Eventually it makes its way back to the bank again. And gets loaned out again. And on and on.
In this manner $100 easily turns into $1,000 or $10,000 or $100,000. Fake money that doesn't exist until all of those loans are repaid in full. And in order to repay, things need to happen, businesses need to be started, value needs to be created, money needs to be made, the economy must grow exponentially, and in doing so it creates even more loans which creates even more fake money driving even more growth. If the music ever stops for any reason, it's all over.
I and probably you are probably working in arrears for our employers. That is, we don't get paid until after the work is done. That is extending our employers a credit line. The same applies for rent, for utilities, for phone data, for taxes...
Credit is at the root of every economic crisis because credit is money.
Hell, taking items from a store's shelves up to their counter is, in a sense, the store extending you credit. Handing over cash so as for the cashier to open a glass case to retrieve an item, vice versa.
There are certain baseline levels of social trust that we tend to take for granted. Easy, too, to overlook that they are easily violated and not universal.
I get paid as soon as my work is done. Sometimes literally and in physical cash. I'm working on transitioning to getting paid for my time before people even enter my office.
Credit is money, but it shouldn't be. We allowed it to become money and it's the reason for so much of the insanity we face today.
I'm going to guess that either you already own your home and your car outright, or that you're renting something somewhere and don't own a car. Or you're wealthy to the point of being able to pay cash or make major purchases without having to save for a while.
In any case, you're already comfortable. You already have what you need. So it's easy to be against the things that would help people slightly less fortunate than you.
Credit is a necessity. For me to save up the money to buy the house I'm in today would literally take me 20 years, because not only would I need to be setting aside $2,000/month, but would also need to still be paying rent at wherever I was. Credit allows me to buy the house NOW and start building equity NOW. Yes, I acknowledge I'll spend a few extra thousand for the privilege, but it's worth it.
Same with a car. If I need a car to get to work, I can't save for 3+ years while paying for Lyft every day if I live too far from work to take a bike or live in a climate where riding a bike is excruciating.
That said, I concede that predatory lending exists. I don't think adjustable rate mortgages should have ever existed. Student loans were a good idea (Provide a way for any qualified person to attend college regardless of current financial status), but ended up with disastrous side effects (Tuition hikes to extract more money, reduced government investment into colleges since students are more able to foot the bill).
I also concede that some people are bad with money. They'll get loans they can't afford and buy everything on credit with no hope of paying it off. They rent things from Rent-A-Center, which is incredibly predatory.
But to argue for the abolishment of credit because some people suck at it is just throwing the baby out with the bathwater. It would absolutely destroy the middle class and kneecap upward mobility of the lower class.
> I'm going to guess that either you already own your home and your car outright
Partially correct.
Yes, I own my car. While I was in school my family bought the cheapest used vehicle there was so that I could go to classes. After I graduated, I continued using that car until I had made more than enough money to buy a new one. I have friends who took on massive amounts of debt in order to have luxurious vehicles right after graduation. I will never do something like that.
Yes, my family owns their homes. Both my parents worked jobs while renting an apartment until they had enough to buy the home I grew up in and in which they live in to this day. It took a lot of effort.
Yes, my education was fully paid for in advance. My parents prepared and planned for it since the day I was born. My father showed me his careful accounting on his ledger, entries dating back decades.
> Or you're wealthy to the point of being able to pay cash or make major purchases without having to save for a while.
Wealthy enough to pay cash? I guess. Without any planning and saving? No.
> Credit allows me to buy the house NOW and start building equity NOW.
What did you really buy? Fail to make your payments and see the true owners of your house take it away from you. None of it is real until the payments are done.
> Student loans were a good idea, but ended up with disastrous side effects
Of course. That about sums up the entire history of credit and debt. A great idea that destroys everything.
> But to argue for the abolishment of credit because some people suck at it is just throwing the baby out with the bathwater.
> It would absolutely destroy the middle class and kneecap upward mobility of the lower class.
On the contrary. Credit and lending are literally responsible for global economic collapse. It destroys the lives of so many it's not even funny.
> Fail to make your payments and see the true owners of your house take it away from you.
The notion that the collateral for a loan could be repossessed because of non-payment is not convincing.
I still own the house. I can make decisions regarding modifications to it without seeking permission from the bank that loaned the money to me, even if such modifications would lower the value.
> Credit and lending are literally responsible for global economic collapse. It destroys the lives of so many it's not even funny.
No, bad credit and lending are responsible. Sub-prime mortgages, ARMs, and "balloon" mortgages.
In your fantasy world where credit no longer exists, home ownership would drop considerably. Very few people would be able to save the money to buy a home because they would have to pay rent while saving up the money. When I bought my house in 2015, I was paying about $1,000/month for rent. The house I bought is costing me $1,500/month for 30 years ($320K @ 3.85%).
Obviously, that $1,500/month includes interest. A lot of it. So let's assume instead I'm saving money and living in that apartment still. Assume that I'm risk-averse and don't invest my money. At $1,500/month, it would take me 18 years of saving to buy that house
Oh, but home prices are almost always going up. The $338K house (I put $18K down, and most of that was a gift from my in-laws) I'm in is currently worth $550K. It would take 30 years of saving to buy this house at that price.
And the worst part is, the entire time, I'm still paying rent somewhere. And that rent is always going up as well! I would need to have a very considerable amount of disposable income in order to save up to buy a house! In 2015, I could afford a $1,500 mortgage. I could NOT afford to pay $1,000/month in rent AND set aside $1,500/month for a house in the future!
So...you'd significantly reduce how many people could buy a house. You'd think "Well, the lower demand would lower prices!", but that's probably wrong. What would happen is that real estate investors would buy up the houses. The big banks already have the cash on hand. They buy them up, rent them out, and further lock people out of homeownership.
Wealth inequality grows, and the economy suffers. The rich get richer as they extract money via rent, building more wealth to buy more houses to rent out.
Your parents were able to buy a house while home prices relative to wages were better. Good on them. But to eliminate the idea of credit now would be a real "I got mine" move.
To do that they create massive inflation and risk which they try to mitigate by implementing the financial equivalent of global mass surveillance. They'd rather commit any atrocity than accept a loss on their risky investment.
Credit is a tool - one that is needed to keep economic systems working correctly. Depressions don't occur when financial systems pull back - Depressions occur when access to financial capital via credit dries up.
That said, as a tool, it is often mis-used (virtually anything that starts with a credit card is in this category).
That being said, abolishing the concept of a consumer credit report entirely is a terrible idea. It is a fact that different people simply present different risks to a lender in their likelihood of default. Having actual data about a person's previous repayment history is extremely predictive of their future default probability (with proper ML applied).
If you remove the ability to use data about that actual person's previous behavior then instead lenders will simply not provide credit or financial services to large proportions of the population whom might be credit worthy as they would be unable to determine if they are creditworthy.
Again, I'm not arguing for the status quo. A lot of reform is needed. But to ignore the reality of how credit underwriting works is foolish. One of the reasons that many developing countries don't have financial services for their populations to access debt is because they don't have sufficient data to do credit underwriting.
And debt is a critical tool to enable investment in the present. Used wisely, debt enables a person to borrow from the future to invest in the present, e.g. buying a car so they can commute to a nearby city and earn a higher salary.