this post was submitted on 14 Aug 2023
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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.