1d ago

Also, your credit score drops if you pay all your debts

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Credit score in Murica is the dumbest thing I've ever heard. You'd think your credit score would be high if you always paid everything in time, were never late and never penalized. Instead you only have good credit score if you're perpetually in debt. Wtf?
- Think of it as a profitability index rather than a diligence index, and it will make more sense.
  
  It will also be wrong.
  The only credit lines I have and have had for the last 7 years (which is as far back as the bureaus care, at maximum) are credit cards. I pay them off every month, so I'm charged zero interest, and they're rewards cards, so their profit off me is literally negative.
  My credit score is over 800.
  
  Your 'reward' is less than the transaction fee they charge the vendors. You use your cards a lot, they make a lot of transaction fees. As long as you never miss a payment, you won't get the interest fee, but miss or be late with just one, any they will charge you interest on the full balance, every month, until you have a $0 statement. That's fantastic for them, but they're perfectly profitable on just your transactions.
  
  Your ‘reward’ is less than the transaction fee they charge the vendors.
  And that has literally nothing to do with customers' credit scores/reports, and my point was to rebut the assertion that credit scores are intended to be measurements of how 'profitable' a borrower is, so it's meaningless to bring up this irrelevant fact I already knew.
- No offense, but you're misinformed.
  You get a good credit score by borrowing money and paying it back faithfully, not by being perpetually in debt. I carry a mortgage but no other debt, and pay off every credit card balance before charges or interest accrue, and my credit score is solidly in the top range.
  I know it's a crazy concept, but to be considered a safe person to lend money to, you have to actually borrow it sometimes and prove that you will pay it back.
  
  You get a good credit score by having debt. That's just kind of common sense, because they don't know how to score you until you gain some debt. That part is mostly okay.
  The dumb part is when you pay off that debt, such as a mortgage or car loan, your score actually goes down.
  
  Your score might go down a bit when you pay off the loan, because those large accounts are no longer being reported as active (and therefore no longer reflecting your current record of creditworthiness). But it's generally a small amount compared to the benefit of having that positive record on your history, and definitely not enough to impact your ability to secure a new line of credit.
  Don't get me wrong--there's a whole bunch of legitimate complaints about how credit scores are calculated and used, but it's also pretty simple to maintain a solid credit score without going into debt. In fact, having that available credit and not carrying a debt benefits your score.
  
  You have to go into debt. If you have a credit card and still pay it off each month, that's still short term debt. A mortgage is debt.
  The point is that if the credit score is supposed to represent your trustworthiness to a potential lender, it is absurd that paying off a debt can lower your score at all.
  
  I mean, "going into debt" is kind of charged language and I don't think most people would apply that to using a credit card and paying it off monthly, even if it's technically correct.
  And to the second, If you had to choose between two people to lend money to today: A person who just today made the last payment on a mortgage after 30 years of on-time payments, or the identical person who finished paying off their mortgage 2 years ago and has not made a mortgage payment since, I don't think it's absurd to suggest the former is a slightly safer bet to lend money to. But again, it's effectively a rounding error in your score.
  
  Hard disagree with your first sentence.
  If you are using a credit card for everything, you are going into debt.
  If you pay it all off every month, you are very skilled at going into debt.
  Thats kind of the whole point of on time payments and carried balance as % of max balance as components of credit scores.
  ...
  You could just be doing the same thing with less steps by using a Debit Card.
  But, the former activity boosts your credit score, and the latter activity does not...
  Despite both people being equally responsible.
  ...
  However, if you lose that discipline, or an emergency happens, and you are on paradigm one...
  Now you get charged interest, late fees, cash advance fees.
  But, in the old school, just use and have a normal, more local bank account model, pre mass proliferation of credit scores...
  Your bank is going to know you, probably trust you, and can offer you a loan themselves, a personal line of credit, and they'll probably give you lower rates, less arcane fee structure.
  ...
  Also... banking locally (with an actual local bank) or using a local credit union....actually keeps money within your local community.
  The local bank is only gonna be giving business and home loans... to local people.
  The local credit union is not going to be massively tied up in things like collaterialized debt obligations trading on Wall Street.
  Smear that all around nationally, globally, you end up with a system that is much, much more prone to highly financialzed, massive scale boom and bust cycles.
  During the booms, the rich get hyper rich.
  During the busts, the poor get decimated, the 'middle' become poor.
  IE, Neoliberal globalism, austerity, etc.
  ...
  The full picture is much more complex than this, but hopefully this is simplified enough that you can see how ... just using credit for literally everything, all the time... primarily benefits wealthy capital owners, and actually makes the economy more fragile, and spreads this fragility, and thus precarity, around like a cancer.
  The all credit all the time model is why during financial crises, the banks get bailed out, and the people get austerity.
  To do otherwise would collapse the finance sector, and well, we can't have that, because then the hyper rich would actually suffer.
  Making having a credit score functionally mandatory to particpate in society, means you are functionally mandated to be reliant on this system that routinely, reliably, predictably booms and busts, transfers real wealth upward to the capital class over time.
  Really not that different than being born as an outright and literal debt slave, its just less obvious, less direct, works more slowly, more gradually.
  The system does not need to be this total, this unavoidable, this unregulated, this inequitable.
  Hell, most of the rest of the world still calls itself capitalist, but doesn't operate in this extremely permissive to the capital class manner that the US does... hypercapitalist, profligate.
  
  There is a lot in this comment, and unfortunately Lemmy is not the greatest forum for in-depth, point-by-point debate; but I did want to at least let you know that I read it all and appreciate you taking the time to write a thoughtful post, even if I don't fully agree.
  I do want to address this specifically though:
  You could just be doing the same thing with less steps by using a Debit Card. But, the former activity boosts your credit score, and the latter activity does not… Despite both people being equally responsible.
  A credit score is not, and should be construed as, a measure of responsibility (I see this line of thought a lot!) It's simply a measure of how risky it is to loan you money based on your established history of being loaned money. (You and I would probably fully agree about it being inappropriate for credit scores to be used for anything outside that scope, however!)
  Fundamentally, credit is a tool. Like any tool, it can be used wisely to your benefit, or carelessly to your detriment. If you treat a credit card as though your credit line is money you did not otherwise have, then yeah you are not going to have a good time (well, not financially at least). If you treat it as a layer of insulation between your bank account and the rest of the world, well the consumer protection benefits of a credit card versus a debit card are a no-brainer. That includes things like theft, as well as an emergency expense that may take you a few days or weeks to arrange cash to fund.
  Calling credit card use "going into debt" feels similar to saying that wearing a seatbelt is "tethering yourself down". Maybe literally true in some sense, but also part of responsible daily life in another sense. I mean, if I pay for my electricity bill with a credit card, surely you wouldn't tell me I was going into debt to keep my lights on?
  I actually do use a local credit union for my checking and basic banking needs. They are pretty good for things like auto loans. Funnily enough though, they were my first stop when mortgage shopping, and not only were they offering over a point above market interest rates, it felt like I was the first person in a decade who had tried to apply for a mortgage with them, and they weren't sure what to do with me. So yeah, banking locally can have its perks, but it can also be hit or miss in my experience--definitely not a panacea and did not give me confidence in using them for major transactions.
  
  I hear you that you don't want a full point by point debate, so I'll just respond as succinctly as I can.
  A credit score is not, and should be construed as, a measure of responsibility (I see this line of thought a lot!) It's simply a measure of how risky it is to loan you money based on your established history of being loaned money. (You and I would probably fully agree about it being inappropriate for credit scores to be used for anything outside that scope, however!)
  I... guess we agree on that last sentence, but you have to know that credit scores are routinely used for all sorts of things other than lending people money, that an entire data economy exists around this.
  Most notably, in country where fewer and fewer people have no option but to rent a living space... If your credit score sucks, you don't get to live anywhere.
  Companies soft pull your credit score before they decide to interviee or hire you.
  Credit scores just are the social credit score all the rightwingers in the US are terrified of China for having, but they're controlled by corporations instead.
  ...
  Calling credit card use "going into debt" feels similar to saying that wearing a seatbelt is "tethering yourself down".
  Two different, domain specific meanings.
  I am focusing on the most literal and technically accurate one.
  You are focusing on the colloquial one, which implies an onerous quantity of debt.
  ...
  As to credit unions being imperfect... yep.
  They're not as competetive in many ways, because they do not have an exceptionally wide array of accounts to spread risk over... they are in my view, more representative of realistic local credit conditions.
  ...
  In general, you ignored my broader, main point of a totally financialized economy leading to a less equitable society... so... yeah.
  Credit isn't a tool you can voluntarily use or not use or use in a different way.
  You have direct control over a hammer. You do not have direct control over your credit report and score, it is abstracted, obfuscated behind layers of bureacracy.
  You also have no choice but to use it, if you want to be an independent adult.
  Its easier to live in the US without a car than without a credit score/history.
  It is not optional if you want to participate in normal society.
  ...
  Welp, I did try to be succinct. I did not do a very good job, apologies for that, lol.
  
  If you have a credit card and still pay it off each month, that's still short term debt.
  What exactly is the difference between taking cash out of your wallet for each expense in a given month, and keeping the cash in there and taking it all out at once at the end of the month, the exact same amount as the sum of the cash you would have taken out over the month each time you purchase something?
  If you're never carrying a balance to the next statement cycle and therefore charged no interest, you're only "in debt" in the most pedantic sense possible, as what you're paying back is not a penny more than what you'd be paying anyway in cash. The literal only difference is when you're paying that same amount.
  
  I'll disagree with you that it's pedantic at all. It's important to highlight that charging things to a credit card is debt.
  
  You can disagree all you like, but you absolutely are being obtuse and pedantic, as much as if I said "It’s important to highlight that borrowing a book from the library is debt."
  Yes, literally, and technically, it is, but in reality, no one actually thinks of borrowing a book from the library in that way, because there is no interest accrued.
  Paying your month's expenses all at once instead of one at a time, by using a credit card instead of cash and paying off the statement balance every month, is functionally identical to borrowing from a library, not to taking out an installment loan with an interest rate.
  
  it is absurd that paying off a debt can lower your score at all.
  I think you're missing an important piece.
  The point is that if the credit score is supposed to represent your trustworthiness to a potential lender today
  My bolded word added. If you pay off all debt and a month goes by (and your score drops) its because they don't have evidence that you still have the resources to service the future debt.
  
  You don't get a good credit score by having debt, there is more to it than that and it is misleading to to state things that way. There are a variety of factors used for credit scores and they are weighed differently depending on what company is doing the credit score. If you want a good credit score then having access to lots of credit you aren't using while paying off debts on time regularly will get you a good credit score. Telling people they can get good credit by taking on debt is bad advice that is more likely to lead them down the road towards bad credit.
- I'm never in debt aside from a mortgage and have 1 credit card I use and pay off every month. No car payment ever. Bills are electric, trash, and cell phone. My score is 825. It was pretty high before the mortgage as well.
- You'd think your credit score would be high if you always paid everything in time, were never late and never penalized.
  That is exactly how it works. That's exactly the situation I'm in, no real debt (only credit cards, which I pay off in full monthly, so no interest) and haven't been since I paid my auto loan off over a decade ago, and I'm in the low 800s, where 750+ is the highest tier in the eyes of basically all lenders.
  Instead you only have good credit score if you're perpetually in debt.
  Incorrect. I'm astonished at how persistent this misconception still is.
  
  Having an active loan is by its very definition being in debt...
  
  Technically, borrowing from a library is also 'being in debt', but no one considers themselves to be "in debt" to a library they're currently borrowing from, because there's no accrued 'interest', you just bring the items back at the specified time.
  Using a credit card over the month and paying the exact same amount at the end of it, as you would have paid piece by piece over the month had you been using cash, is essentially the same thing.

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