this post was submitted on 14 Aug 2023
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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.
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.