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What's a bit of good advice that's really bad advice?
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this post was submitted on 31 Mar 2024
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Neither of these is dead wrong but were rules of thumb that oversimplify changing and complex issues in the US:
"stay away from credit cards" - often prevents people from actually learning about how underlying mechanisms of loans, interest, credit ratings, and budgeting work. There are definitely people incapable of having access to credit and not spending it, so the saying may be true for a subset but if you always pay your bill in full on time and just use autopay so you don't forget, you're leaving 1-5% annual rebate for almost all your spend on the table. If you play credit card churning games, much more.
"The only things worth going into debt for are a home and education." - while accurate in the US for decades, the applicability or even accuracy of this statement is now dubious depending on many factors: career field and interests for education; interest rates, geography and housing prices for homes.
The entire "credit rating" system is totally insane and dystopian for people outside the US. Where I am from, we only ever register bad credit, not good credit. If you want to buy a house and need to get a mortgage they can ask for your credit rating. But that only shows how much your current obligations to other creditors are, and whether you have had trouble paying them. And you only cartain obligations are allowed to be shown on such a report.
In my country, someone with no credit card history whatsoever is in a better position to get a mortgage than someone who has a credit card and pays it off every month. The fact that the US is the reverse is just mad.
The test is to see if you can handle having access to credit you don't use. Can you operate within the current financial system without going bankrupt?
It is also the reason why recent inquiries on credit can also tank a credit score. You're riskier to lend to because you are trying to get more debt than you were used to.
There’s probably a healthy middle ground. We shouldn’t be handing major loans to people with no experience with credit either
We absolutely should. As long as they have enough stable income to support it. Rough guidelines in The Netherlands is that you can get a mortgage for about 4-5x your yearly income (subtract any other loans like credit cards, phone contracts or cars), and for no more than the house is actually valuated at (unless you're going to remodel, then you can borrow for the estimated value after it is done).
Why not? The concept is fairly easy to grasp and if I want a loan for a house, the bank can ask me to prove that I was able to put aside enough money beforehand to be able to chip away at a credit from now on.
What about people who have good-paying jobs, but lots of other debt? Or a history of defaulting on debt (maybe they can’t hold jobs very long)
Usually you’d go to the bank with the project and they ask you for securities, oftentimes the house your building or the ability to garnish your wages. Also they demand to know how much you’ve saved so far. Can’t give loans to everyone?