Credit Scores and Committed Relationships(brookings.edu)
brookings.edu
Credit Scores and Committed Relationships
http://www.brookings.edu/research/papers/2015/10/02-credit-scores-committed-relationships-dokko
44 comments
To me, it's simpler. You have people who 'believe' in the current system and their role in keeping it stable and sustainable. And, you have people who don't believe or just don't care.
I am unfortunately a believer. I've always wanted to disregard the whole silly, archaic system, but I can't. I'm very 'responsible' by nurture. My spouse is also a believer. We have a very stable relationship, we're very responsible, trustable, and, of course, have perfect credit scores all because of our silly beliefs.
I am unfortunately a believer. I've always wanted to disregard the whole silly, archaic system, but I can't. I'm very 'responsible' by nurture. My spouse is also a believer. We have a very stable relationship, we're very responsible, trustable, and, of course, have perfect credit scores all because of our silly beliefs.
>You have people who 'believe' in the current system and their role in keeping it stable and sustainable.
I'm not sure what you mean by 'believe' but it makes it sound like there aren't obvious, objective benefits to paying bills and having a good credit score. I don't like the system either, but it results in me not having to pay higher interest rates on loans, not having to put down large deposits for rent, getting to purchase things on credit, etc.
I'm not sure what you mean by 'believe' but it makes it sound like there aren't obvious, objective benefits to paying bills and having a good credit score. I don't like the system either, but it results in me not having to pay higher interest rates on loans, not having to put down large deposits for rent, getting to purchase things on credit, etc.
I think what contributes to separation is a feeling by one party that the other one is "not responsible" with money. As with everything else, they then have to make a choice: let that affect the relationship, or not. There is also the fact that if one party earns way more than the other, then its bound to affect the relationship, especially in modern societies which believe in financial independence as a pillar of personal achievement.
Does it help a relationship if you have two non-savers together? As you rightly point out, money problems are major cause of relationship conflict and breakdown, but are these less common if you have two reckless spenders in a relationship rather than just one? I would have thought that having two reckless spenders would just accelerate the process of hitting money problems.
That's a good question and I was thinking about the same when I read the paper. I have never investigated this aspect of credit scores in my career so don't really know the answer. My guess is people who have similar score, even if it is bad, probably tolerate each other more than when they have very different styles. I am not sure if the paper looks at this deeply (they seem to only compare differentials and stdev at formation).
The study could have answered this question, but they don’t seem to have looked at it. All their analysis is comparisons of couples with different scores, not what effect absolute scores have on relationship robustness.
My anecdotal experience is spendthrifts have a lot of relationship problems that are not helped by being with another spendthrift.
My anecdotal experience is spendthrifts have a lot of relationship problems that are not helped by being with another spendthrift.
Agreed. You are probably right about the outcome. It is easy to just add an interaction of nominal score group (high, med, low) vs. mismatch/match and see if there is an effect.
At our startup we get depersonalized credit data but we don't have a nice panel like the Fed :) so cannot really do that analysis on our end. I would be nice if they released this data publicly -- once it is setup for modeling (with just a few variables), it is so hard to re-identify so the risk of privacy invasion is low. I doubt that will happen though.
At our startup we get depersonalized credit data but we don't have a nice panel like the Fed :) so cannot really do that analysis on our end. I would be nice if they released this data publicly -- once it is setup for modeling (with just a few variables), it is so hard to re-identify so the risk of privacy invasion is low. I doubt that will happen though.
If I were the authors I would be writing the follow up paper explaining exploring this - why write one big paper when you can salami-slice the data up into a couple of papers.
>Credit scores and match quality appear predictive of subsequent separations even beyond these credit channels, suggesting that credit scores reveal an individual's relationship skill and level of commitment.
From an economic perspective this looks like time preference. Individuals who place a greater value on enjoyment in the present compared to enjoyment at some time in future are less likely to save money for the future, preferring to enjoy it now, and are also less likely to persist through the difficult parts of a relationship in pursuit of some future benefit from having a lasting relationship. I prefer the economic perspective as it's more impartial, and doesn't make the assumption that lack of "relationship skill" is the cause of relationship failure.
From an economic perspective this looks like time preference. Individuals who place a greater value on enjoyment in the present compared to enjoyment at some time in future are less likely to save money for the future, preferring to enjoy it now, and are also less likely to persist through the difficult parts of a relationship in pursuit of some future benefit from having a lasting relationship. I prefer the economic perspective as it's more impartial, and doesn't make the assumption that lack of "relationship skill" is the cause of relationship failure.
I thought credit scores were more influenced by payment promptness and reliability rather than saving propensity. Isn’t one of the problems with people with high savings and no debt is that their credit score is lowish purely because they don’t have any evidence of prompt payment of debt?
While your statement about payment promptness is correct, people with good scores tend to save more than others (scores do not use savings or income or wealth into account, however).
Credit scores only penalize you when you don't have any credit but most of these good score folks tend to have (or had) a mortgage or have had auto loans, etc. Just because they are not actively opening new accounts does not mean they will be penalized -- credit scores look at pretty much everything in your report and they get credit for their historical good behavior.
Another thing to consider is that good credit scores leads to a positive cycle: you don't pay high interest rates on your loans and the extra money saved here allows you to pay down obligations faster, which in turn allows you to save more in the long run.
Credit scores only penalize you when you don't have any credit but most of these good score folks tend to have (or had) a mortgage or have had auto loans, etc. Just because they are not actively opening new accounts does not mean they will be penalized -- credit scores look at pretty much everything in your report and they get credit for their historical good behavior.
Another thing to consider is that good credit scores leads to a positive cycle: you don't pay high interest rates on your loans and the extra money saved here allows you to pay down obligations faster, which in turn allows you to save more in the long run.
What about people with no debt? If you own your home and don’t carry any consumer debt then you look like a bad credit risk despite being one of the best risks.
It depends on what you mean by 'no debt'. If you mean, they have never ever had a loan then they will most likely not even have a score or a poor one (they will be categorized as a 'no hit' or 'thin file'). Don't have stats top of my head for this group but my hunch is no-hit / thin-file are people with poor access to credit and not many actively avoid debt altogether.
If you mean, they had debt but they paid it all off, then they will still get a lot of credit for it. Credit scores look at your 'oldest tradeline' and maintaining good credit over many years is viewed favorably. Their scores will not be as high as someone who had recent credit transaction and managing it well (all else being equal), however, it will still be very good. If you look at the FICO Score, anything above a 760 or 780 is usually just bragging rights -- it hardly changes your rates on mortgages or loans.
If you mean, they had debt but they paid it all off, then they will still get a lot of credit for it. Credit scores look at your 'oldest tradeline' and maintaining good credit over many years is viewed favorably. Their scores will not be as high as someone who had recent credit transaction and managing it well (all else being equal), however, it will still be very good. If you look at the FICO Score, anything above a 760 or 780 is usually just bragging rights -- it hardly changes your rates on mortgages or loans.
I'd lived in the US for about five years before I bothered to get a credit rating. I remember when I was renting an apartment the agent looked shocked that I didn't have one.
"How can you not have a credit rating? Don't you have a car? Or a phone?"
I said "Uh yeah, I paid cash for my car, and my phone is prepaid".
I had a helluva time convincing him that someone who never has to borrow money (and can buy brand new cars for cash) is a better credit risk than someone who borrows money all the freaking time.
Eventually I gave in and got a credit card for the sake of miles. Sheesh!
"How can you not have a credit rating? Don't you have a car? Or a phone?"
I said "Uh yeah, I paid cash for my car, and my phone is prepaid".
I had a helluva time convincing him that someone who never has to borrow money (and can buy brand new cars for cash) is a better credit risk than someone who borrows money all the freaking time.
Eventually I gave in and got a credit card for the sake of miles. Sheesh!
It is amazing this isn’t it. Being rich enough to not need to borrow makes you a bad credit risk.
We seem to have some very knowledgable people here so why is it that credit scores don’t start at a default value and go up or down based on your credit history. Why is a rich person with no debt and huge amount of assets more of a risk than an undischarged bankrupt?
We seem to have some very knowledgable people here so why is it that credit scores don’t start at a default value and go up or down based on your credit history. Why is a rich person with no debt and huge amount of assets more of a risk than an undischarged bankrupt?
Because not having a credit rating is the absence of information, not evidence of being rich/responsible enough to never need credit. You're an unknown quantity, it's impossible to establish what a default score should mean, except "we don't know you, so we're gonna err on the side of not lending you money". What you really want is to be able to record evidence of having bought a car with cash, of consistently saving etc with the credit rating system, but that doesn't exist.
The system optimises for what it (probably correctly) perceives as covering the large majority of situations. Sure, sometimes that leads to some curious corner case situations but it's hard an indictment of the system.
The system optimises for what it (probably correctly) perceives as covering the large majority of situations. Sure, sometimes that leads to some curious corner case situations but it's hard an indictment of the system.
>> Why is a rich person with no debt and huge amount of assets more of a risk than an undischarged bankrupt?
Good point and as mseebach points out absence of information is a signal and these type of no-debt cases are very rare that is hard to build a model around.
At our start-up SimplyCredit, we look at things holistically, not just your credit score and that should help with your concern. However, it is harder to do this effectively without proper data at scale. I wish the govt. made different types of data about the borrower available to lenders (with permission from the borrower of course) -- for example, it will be nice to know electronically someone paid for mortgage outright or their income statements, etc. Right now people attempting to use this information have to resort to approaches that Mint uses (scraping, partnership with banks to not block them, etc.).
That said, credit scores actually work in a manner similar to what you suggest. Credit scores are 'centered' around a value and good things get you +score1 and bad things get you -score2, bad things you didn't do +score3, etc. It is not exactly what you suggest as no-hits don't automatically get neutral rating -- most case those apps will get rejected.
Good point and as mseebach points out absence of information is a signal and these type of no-debt cases are very rare that is hard to build a model around.
At our start-up SimplyCredit, we look at things holistically, not just your credit score and that should help with your concern. However, it is harder to do this effectively without proper data at scale. I wish the govt. made different types of data about the borrower available to lenders (with permission from the borrower of course) -- for example, it will be nice to know electronically someone paid for mortgage outright or their income statements, etc. Right now people attempting to use this information have to resort to approaches that Mint uses (scraping, partnership with banks to not block them, etc.).
That said, credit scores actually work in a manner similar to what you suggest. Credit scores are 'centered' around a value and good things get you +score1 and bad things get you -score2, bad things you didn't do +score3, etc. It is not exactly what you suggest as no-hits don't automatically get neutral rating -- most case those apps will get rejected.
People without a credit score fall into three categories which really have nothing in common in regards risk. 1. The unbanked (i.e. very poor). 2. The very wealthy or the moderately wealthy with an aversion to debt. 3. Recent immigrants. While I suspect 2 is relatively small, both 1 and 3 are quite large pools. Treating all three as a greater risk than someone with a history of poor debt management seems perverse.
The risk profile of a recent legal immigrant with a PhD and a high paying job is very different to someone that has never had a bank account and who has worked for cash in hand. Why treat them the same? At the very least let someone with no history of credit establish a credit score baseline based on their international history, current income, and assets.
The risk profile of a recent legal immigrant with a PhD and a high paying job is very different to someone that has never had a bank account and who has worked for cash in hand. Why treat them the same? At the very least let someone with no history of credit establish a credit score baseline based on their international history, current income, and assets.
Get a free credit card, put a little spend on it every month, and pay it down every month. Yes, it will take a little bit of discipline, but showing discipline is what having a good credit rating is all about.
You won't pay any interest or fees, and it will go a long way to establish a positive credit record which will come in handy if you will need real credit down the line. Even if you think you won't, having options is always better than not having them,
You won't pay any interest or fees, and it will go a long way to establish a positive credit record which will come in handy if you will need real credit down the line. Even if you think you won't, having options is always better than not having them,
You may be right actually, I didn't consider that. I'm Australian and here I think the system works a bit differently, so banks and whatnot will take into account your savings history when determining whether to loan you money.
It's still the case in the US though that someone who saves will do a better job of payment reliability than someone who borrows the same amount of money but doesn't save, as the former will always have savings on hand with which to make repayments, while the latter may not.
It's still the case in the US though that someone who saves will do a better job of payment reliability than someone who borrows the same amount of money but doesn't save, as the former will always have savings on hand with which to make repayments, while the latter may not.
I am Australian too :)
We do have credit scores here now, but I have never bother to look into mine (I don’t have any debt other than a credit card which I pay off each month). I think our banks are a bit more holistic when it comes to debt issuing than US banks which seem to be fixated on credit scores.
On the topic of credit scores they are a huge pain if you move to the USA. I remember having a huge problem buying almost everything that required monthly payments (phone, cable, rent, etc) because I did not have a credit score. If someone wants a good business idea start a credit rating agency that is able to rate US immigrants and gives them rational credit scores based on their previous credit history in their country of origin.
We do have credit scores here now, but I have never bother to look into mine (I don’t have any debt other than a credit card which I pay off each month). I think our banks are a bit more holistic when it comes to debt issuing than US banks which seem to be fixated on credit scores.
On the topic of credit scores they are a huge pain if you move to the USA. I remember having a huge problem buying almost everything that required monthly payments (phone, cable, rent, etc) because I did not have a credit score. If someone wants a good business idea start a credit rating agency that is able to rate US immigrants and gives them rational credit scores based on their previous credit history in their country of origin.
Some employers have deals with banks to vouch for you when you don't have a score. I got a US credit card when I moved here and bootstrapped my credit profile from that.
I am self-employeed and luckily wealthy enough that I don’t need debt, but found the process of everyday living very frustrating without a credit score. The fact that you have to play a game to create a credit score says the credit score system is broken, at least when it comes to immigrants.
Credit scores are like g in that they are highly predictive of a wide range of seeming unrelated human activities. I am always amazed at how humans are so predictable from such simple scores.
So we need to make a new dating app that matches you by your credit score?
Companies in America repeatedly charge people $10, $50, $200 or more than they should have, and then you either have to pay to hire a lawyer or pay them. If you don't then you get a bad credit score, and all the other companies that use the credit system will charge you more.
In Austria, credit bureaus like in America are seen as corrupt and criminal. China also doesn't have a central credit bureau.
I feel bad for every american when I hear intelligent people muse about making it more complex. You are just increasing the ability of companies to walk on the poor. This creates a bad bottom end of society, which America suffers from and Austria does not.
America has crumbling cities like Detroit, and it's because of the criminal thieving credit bureau, but here in this thread we have lots of people talking about the credit bureau without even taking civilization into account.
In Austria, credit bureaus like in America are seen as corrupt and criminal. China also doesn't have a central credit bureau.
I feel bad for every american when I hear intelligent people muse about making it more complex. You are just increasing the ability of companies to walk on the poor. This creates a bad bottom end of society, which America suffers from and Austria does not.
America has crumbling cities like Detroit, and it's because of the criminal thieving credit bureau, but here in this thread we have lots of people talking about the credit bureau without even taking civilization into account.
That's rather a long bow to draw based on the occasional overcharge (which you should be able to get your credit card company to reverse anyway).
No its not. I imagine there are millions of lower class people in America that get charged an extra $50-$500 every month with a dare to hire a lawyer or take a hit on their credit score, of which they can take neither, so they pay a thief his made up fees. There's probably other examples of this I could imagine. Without even speaking about the psychological trauma that is present here, it looks about as criminal as stealing lunch money from random people.
This isn't civilized behavior and it should not be tolerated in the USA.
This isn't civilized behavior and it should not be tolerated in the USA.
That's a lot of imagining you're doing right there. The US is not Austria. It has ~310m more people. The China example is just lol worthy.
It's imagining I talked about but its reality I'm portraying. Let the story telling begin, blumkvist!
Do you have any evidence to support your story or is it pure fiction?
It is reality. There is a gap in morality here wide enough to oppress the poor, but small enough so that those with family lawyers and savings don't need to worry very much.
Investigate the people who feel they have been abused by the credit bureau, the evidence will be everywhere. It is only obvious.
It's also worth noting that it is in the interest of those with a high credit score to defend the system even though it enables criminal behavior towards the poor. Shame.
Investigate the people who feel they have been abused by the credit bureau, the evidence will be everywhere. It is only obvious.
It's also worth noting that it is in the interest of those with a high credit score to defend the system even though it enables criminal behavior towards the poor. Shame.
Can you present data to back up your claims or can you not? You keep making assertions stating this is the reality. It should be easy enough to show some proof.
All one needs to do is inspect the logic of the victim in order to understand the criminality. He has enough resources to pay the unwarranted charges and avoid a bad credit score, but he doesn't have enough resources to acquire a lawyer.
An activist could conduct an investigation and prove the same if that's what the American system requires. I have no doubt that American companies are victimizing millions of people because of their poverty. American people and American society will continue to suffer. Shame.
An activist could conduct an investigation and prove the same if that's what the American system requires. I have no doubt that American companies are victimizing millions of people because of their poverty. American people and American society will continue to suffer. Shame.
So all you have is speculation based on your convictions. Yet you feel that is enough to form a strong opinion and more over, express it with unshakable confidence. Attempting to persuade the public with argumentation based not on sound reasoning, but indignation. Shame.
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austrian(1)
I think their trustworthiness hypothesis is probably weaker than other parts of their analysis. I have my own hypothesis based on my experience working in this industry: Staying in a committed relationship may not be really about 'responsible' behavior but could be due to similarity of financial management styles. Most marriage counselors talk about 'sorting out your finances' before getting married; credit scores are essentially capturing that issue -- people who have very good credit scores tend to be savers (although credit scores do not use income or wealth into account) and ones who have poor scores tend to be financially poor and for the large part spend more than they can afford. Also people with good scores tend to be manage finances in a particular way -- pay bills early, monitor balances regularly, etc. -- while the ones with poor credit scores do not usually pay much attention to finances and miss payments frequently.
When you have two people with two different styles of managing money, it can lead to a strained relationship and subsequently lead to separation.