Credit scores are bullshit

Matt Haughey explains why credit-scores are bullshit: "I had the highest credit score at a time in my life when I was leveraged to the hilt and I lived paycheck to paycheck. Now that I have my own business, a healthy retirement, and can pay for everything I need/want, I have a low score and I'm dubbed a higher risk even though my ability to pay is very high."

I write books. My latest is a YA science fiction novel called Homeland (it's the sequel to Little Brother). More books: Rapture of the Nerds (a novel, with Charlie Stross); With a Little Help (short stories); and The Great Big Beautiful Tomorrow (novella and nonfic). I speak all over the place and I tweet and tumble, too.

MORE: Business • finance • money

More at Boing Boing

The technology that links taxonomy and Star Trek

Hackers prepare for first "national holiday" in their honor

Mujokan

My credit score is amazing, because I’m a hermit.
http://boingboing.net/ Rob Beschizza

I reckon credit scores are measures of how much revenue a customer will generate, not their ability to pay.
- http://pulse.yahoo.com/_IRIVY45SAFAU5MJL25DMMQV2NY NoneL
  
  Interesting. No outstanding debt? No interest accrued and no money to lenders. By george I think you’ve nailed it.
  - xunker
    
    Also, less sarcastically, no history of repayment.
    
    Remember, if you owe no money to anyone no one knows if you ever pay back your debts.
http://twitter.com/alanpeart Alan Peart

That’s because credit scores aren’t intended to work out your ability to pay back the debt, but the amount of money that can be made from you. If you’ve lots of money, you’re likely to keep your credit cards clear, thus not paying the companies loads of interest.
- http://pulse.yahoo.com/_7JZFIK3AWY6DKT6EK734UG3I54 Totally
  
  Correctomundo! I make a really, really nice living. Every year I make more than the year before. My home is paid off, as are both of my cars. Basically, I have no debt. But, because I pay ALL my bills, credit card and others, in full every month, my credit score drops every year. The banks and CC companies aren’t making much on me, only the swipe fees merchants pay. This, they do not like. It really doesn’t matter to me. There is nothing I buy for which I cannot pay cash. I use credit cards because they give me cash back and better warranty protection. Our credit system, like our stock exchange systems, make no logical sense. It is all perception about what may happen somewhere in the distant future.
http://www.facebook.com/people/Justin-Forposting/100002531076048 Justin Forposting

So is most of high school, but it teaches you to either learn how to play the game or wind up spending most of your time upside down in a locker. He needs to get a couple cards, use them often but pay them off every month: the game likes regular payment of debt. It’s a free way to keep your credit score high, you can even earn cash back with the right cards.
- Joshua Ochs
  
  Exactly. Credit scores don’t measure your financial ability to pay back debt, they measure your financial history of paying back debt. To a certain extent this unfairly hurts those who pay in cash and carry no debt. However, this means the credit bureaus have much less data on how said people manage debt, and aren’t going to step up and say they’re creditworthy as a result.
- digi_owl
  
  https://secure.wikimedia.org/wikipedia/en/wiki/Goodhart%27s_law
WaferMouse

I thought this was fairly common knowledge. Suddenly starting to wonder whether my mother missed her calling as a financial advisor.
Joshua Ochs

People can’t be reduced to a single number.
See also: SAT scores, GPA, bank account balance.
- Guest
  
  Correct, but MBA’s are not known for their qualitative thinking skills.
- digi_owl
  
  Sadly those MBAs love their single number comparisons.
  
  Hell, it may be a human thing. Just consider how we buy computers based on MHz, cameras based on MP, or even cars based on horsepower. We are addicted to single number comparisons it would appear.
  - http://www.matthewpetty.com/ Matthew Petty
    
    I read a stat somewhere that said there are now more MBA’s in the world than people.
    - digi_owl
      
      Must be a clerical error ;)
metaleaf

I’ve been trying to establish a credit rating lately. Since moving to this country I’ve had no need for credit – I’ve had enough money to get by. Thus: no credit score here, even though I’m fully equipped to pay off any debt I might accrue.

I went in to my bank to see what I could do to get established in the credit system, hoping for a low limit credit card. It turns out that the only way I can establish credit is to take out a loan, but to freeze, as collateral, the exact amount of the loan in another account.

Effectively loaning money to myself.

So yeah, the credit score system is bullshit.
- slab99_99
  
  I don’t know if it still works, but try applying for a store card, like Sears or Target. That’s how I was able to build enough credit to get a Visa card or MasterCard.
- http://pulse.yahoo.com/_7JZFIK3AWY6DKT6EK734UG3I54 Totally
  
  Welcome to Amerika! Now bend over, this will hurt for only awhile ….
IamSmartypants

Painfully true, having just finished a nine month runaround with WellsFargo to refinance my house, even though I’m more than $100,000 above water, never missed a house payment, have no outstanding debt aside from a few late bills and no credit cards. They wouldn’t even talk to me for five months, then called out of the blue to ask if I still wanted to refi.

Fast forward four months, three lock expirations due to their internal delays, two sets of screwed up paperwork and a WellsFargo notary who didn’t know how to properly notarize, it finally closed last week.

On the other hand, Joshua, I had a very high PSAT score, so you must be wrong about the other numbers. ;-)
Antinous / Moderator

My FICO was over 800 in a year when I made $8K and owed $30K on credit cards.
Guest

Um, DUH?
http://www.matthewpetty.com/ Matthew Petty

In a recent credit refusal letter, I was told I can’t have credit because I don’t use enough of my credit. In another section of the same letter, I was told I can’t have credit because I use too much of my credit.
- http://www.facebook.com/people/Jerry-Vandesic/100002525753309 Jerry Vandesic
  
  Turn down reasons that seem like they are pointing in opposite directions can happen when you have data that has signficant correlations between variables. This is called “partial correlation sign reversal” and can create situations where the reasons are absurd (e.g., too few late payements) or the opposite of each other. Sometimes this is due to poor statistical modeling, and sometimes it is due to regulatory requirements that specify how a turn down reason needs to be specified, even if that specification is legally correct while mathematically incorrect.
  - http://www.matthewpetty.com/ Matthew Petty
    
    A big part of my problem is that I have very little credit history, having moved from the UK in 2008. I have a good salary, I owned my place in London. But now, here, I’m a statistical anomaly. The bank clerk says, “With your salary, no problem”. Then a minute later, “Computer says no.”
    http://www.youtube.com/watch?v=zFl6p4D59AA
http://www.facebook.com/profile.php?id=613890938 Subhan Michael Tindall

I believe credit scores are actually based on a correlational statistical model, not a causal one. In other words, there is no causal relation express or implied between any piece of your personal data and your credit score. People matching level Y on X of Z criteria are correlated with high revenues & low risk, and get score S as a result.
- http://pulse.yahoo.com/_7JZFIK3AWY6DKT6EK734UG3I54 Totally
  
  I agree, the system is basically a statistical predictor model. It’s not that YOU are a bad credit risk. It’s that people who resemble you, financially, may be bad credit risks. It’s the same theory as why males 16-28 pay much higher car insurance premiums. YOU may be a prefect driver at 21 … no tickets, no accidents, nothing adverse on your record. BUT other 21 year-old males Do have adverse records, and you are lumped in with them, and pay higher rates to offset someone else’s cost to the company. Welcome to corporate socialism.
http://www.facebook.com/andycoder Andy Coder

I get that there are issues with the existing credit score system, (the fact that an individual isn’t always entitled to see, for free, where they stand is a big one), but this guy’s argument doesn’t really work for me.

In particular, he made one big mistake — closing his cards shortly after paying them off. Especially since his oldest account seemed to make up a great portion of his open credit, not only did he put himself in a situation where small credit spending could make him look stretched, but the average age of his open accounts plummeted. Length of credit history and utilization are big parts of what goes into a credit score, and these are the parts of the score which, to me, make some sense. If he’d only maintained more open credit, that vacation wouldn’t have seemed like such a high balance, (though waiting a month might’ve done the same trick). And if he’d kept his first account open, there would’ve been the length of history to help offset it.
http://www.facebook.com/people/Jerry-Vandesic/100002525753309 Jerry Vandesic

Matt needs to learn what a “distribution” is and why a single data point that differs from the mean of that distribution doesn’t imply that the the model is incorrect. Poor statistical thinking is fairly common, but I am surprised that bb would fall for it. If you need some help, “Statistics in a Nutshell” by O’Reilly is a good place to start
Emo Pinata

Credit scores are really just a credit history from over a year before
you get the score to a few years back along with what active credit
lines you have. For a high score you simply have to pay all your bills
one time (all of them). They don’t care about how much you make, which
is why applications have a space for income separate from looking up
your credit score.

The problem is that small business owners have great business credit,
but that means nothing for their personal credit. If you pay off all
your debt, and then never keep a personal line of credit open, then of
course your score will drop down lower. It’s a simply fact that someone
who has correctly handled their credit (even paycheck to paycheck) is
simply more likely to not get in over their heads than someone that has
had no credit history in the past couple years.
awjt

Here’s a little heart advice for fellow travelers:

Save for everything; pay cash. Negotiate. When you are driving your hard bargain and they are just about at the point of their last refusal, that’s when you flash your cash. They will either cave or you walk away.
Plastic has made the world soft. All the better for me and my kind.
- http://www.facebook.com/profile.php?id=607675355 Brent Kirkham
  
  I am 5 days away from being completely, and utterly debt free. When that happens, my credit rating will plummet, because I’m not taking out any more loans, no more plastic, no more credit.
  
  Remind me again about having a house from an Oceanian perspective, bearing in mind that them nasty native fellas have all been dealt with. You put a stake in the ground, call it “mine” and there you go. Build something. Go for it.
  
  Here on Airstrip One, we have these folks called ‘Aristocracy’ who own all the land, you build, you pay them…… forever. Actually not true, only a thousand years. A thousand f*cking years!!! When did that get agreed to?
  
  Some info:
  http://www.independent.co.uk/news/uk/crime/who-owns-britain-biggest-landowners-agree-to-reveal-scale-of-holdings-443956.html
  
  Last on the list is the Duchy of Cornwall. That’s Prince Charles to us. Ask about taxation, you’ll find it’s very similar to corporations being registered as people. Doesn’t apply.
Heavy Metal Yogi

What disturbs me the most is how man prospective employers are doing credit checks as a first measure in screening applicants. It would be one thing if it was limited to jobs in finance, but it’s in all categories of jobs. I used to feel a little violated by the personality tests and criminal background checks, but nowhere near as violated as it is now with employers checking my credit.
http://www.zhrodague.net/ Drew from Zhrodague

Yup. Went through multiple grindstones to pay off all of my stale credit card debt. Now I cannot get any kind of credit card, and expect to not be able to qualify for a mortgage. No good deed goes unpunished.
crnk

That sounds good and all, but I want to see you try to pull it off with an airline booking, car reservation, or at a restaurant.
I won’t argue that cash is a bad thing, just that your concept is no more perfect than charging everything. Plus–I’ve been to China, the land of haggling. I personally found it annoying and bothersome to negotiate unreasonable prices constantly…$2 for a bottle of water, worked down to a bit under a dollar.
http://twitter.com/ohfuckinreally awhellno

Perhaps it is a conspiracy to encourage those who are on the edge to fall into spending related debt and interest payments?
phillamb168

Expat in Europe here. All I have to say is, haha! I escaped that horrible system. So long, suckers!

Which is to say, of course credit scores are bullshit, and anyone telling you that they aren’t is either selling something, or so dependent on their own credit score that were it to go away, they wouldn’t be able to live at their current lifestyle level anymore.

Across the pond in the civilized world, credit is determined by how much you make and how much savings you have, and credit cards as they exist in the US don’t exist here. You can apply for an AmEx, but you better have the cash on hand to back it up. You can apply for department store cards, too, but you can only use them at those specific shops, and they take a copy of your IBAN info and you grant them permission to take money out of your account if you’re past due.
http://about.me/roxanne.weber Roxanne

Credit scores were never meant to be useful to the consumer, except to determine, as others have said, how much money they could and would spend. In today’s economy this, like many other economic thinking processes in our country, needs to be revamped. I wouldn’t hold my breath, however. There are too many folks that would feel lost without this control over consumers.