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PaperclipPerfector  4mo ago (text post)   26645 thread views

Culture War Roundup for the week of December 11, 2023

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On Credit Scores

I stumbled across this voxplainer on pocket: https://www.vox.com/videos/2023/12/14/24000469/what-does-credit-score-mean, and it reminded me of the Biden admin rule increasing the fees on mortgages to borrowers with good credit(https://thehill.com/opinion/finance/3978409-why-is-the-biden-administration-punishing-financially-responsible-homeowners/), and I think that at the time the justification was some kind of racial justice angle. And that in turn led me to think "golly willikers, people are going to start fighting each other over credit scores, might as well get ahead of it on the motte". (If you're not familiar with how credit scores work for some reason, here's an advertisement for a credit scoring company that explains pretty well: https://www.experian.com/blogs/ask-experian/credit-education/score-basics/understanding-credit-scores/).

Well not really, I'm not a 50's comic book character. But it seems odd in retrospect that we didn't have a motte discussion in April/May about the change in fee structure, and it seems like there is or is about to be a woke push to try to adjust credit scoring for equity reasons, and this is the kind of boring economic mismanagement that can really jack up the economy if it happens. Now most of the things vox suggests are anodyne if probably stupid and mildly negative, but it's easy to see a jump to government rules getting a whole lot stupider and more destructive; the whole sector is very heavily regulated.

Now a personal story- when I was much younger, I needed to buy a car because the beatermobile I had was broken down and I lived too far from work to walk(and in Tarrant county, there is no public transportation to speak of), and I decided I might as well buy something good that would last a while, even if I had to borrow for it, in lieu of buying another craigslist beatermobile that I'd have to replace in a year or two. I found a good gently used truck online, it was a good deal... and I got denied financing because of lack of credit history. But, my dad put it in his name and told me to get a credit card with a major bank and pay off the full amount on autopay so we didn't have to do that again. I'm still driving that truck and haven't had to spend any money on repairs in five years except new tires(because there was something in the road) and a battery(which was cheap), and I have good credit and don't need my parents to cosign loans. But I can easily imagine if I'd been estranged, didn't know who my dad was, just had parents who were financially illiterate/had bad credit(but I repeat), whatever. I would have had to buy a beatermobile, spend as much on mechanical repairs as I did on buying it, and then buy another beatermobile and do the same thing. And I wouldn't have been able to buy a house; I'd have been stuck in flophouses or the kind of apartments that don't bother to have an English language application because it's all illegal immigrants. So I can kind of see vox's point- there really are people with generational advantages(I'm one of them), although I don't think most of it is an aftereffect of 50s racism(it's mostly just lack of impulse control) some people get the short end of the stick. Most of them would probably still be behind if we had a level playing field, sure, but we don't- something as simple as "your parents can give good advice" is a major advantage, and it correlates with being the sort of person who would figure out how to have a good credit score anyways, but it's not a perfect correlation.

And for a lot of reasons, people who lack those major advantages are disproportionately black, and this isn't fixable. I happen to hold the belief that we shouldn't try very hard because of omelets, eggs, and the history of ideologically-driven progressive interventions in the economy. Current credit scoring is probably about as fair as can reasonably be expected(which is not perfectly fair). Adding financial literacy classes to high school curricula might be good, but let's be real, the kids who need the instruction aren't learning anyways. I don't think there's much to be done about it, and credit scoring formulae do what they're intended to do, which is accurately reflect creditworthiness.

However, it does not seem to me like people holding the opposite view are obviously delusional the same way as progressive attitudes towards crime are. Some people, through no fault of their own, are bad credit risks, and there really are things that don't get reported to credit agencies which probably should so some people who are good credit risks lack sufficient history for a credit score. And so we can probably expect the "we should do something to make credit scores more equitable" idea to survive the backlash against woke. Vox mentioned multiple states banning the use of credit scores in making insurance decisions; I don't support this, but it's perfectly understandable to me that some people would even if I disagree with them. It seems like this is an underrated aspect of wokeness which will probably survive and where the woke have the potential to do real damage. The Biden admin rule above I don't expect to have good results, but it also seems like something with a pretty minor impact, but which is also the tip of the iceberg. Which raises the question: what else might a woke federal government do to try to hamfistedly improve "equity" in this area?

Back when I entertained the idea of staying in the US for good, I bootstrapped myself to a passable credit score using a Chase secured credit card. Took a few months but everything else fell out of there.

Generational disadvantages in credit scores are downstream from generational disadvantages in executive function and time preference.

Yes, they are. And from my perspective that’s unfair in many(certainly not all) cases, but it’s as fair as can reasonably be expected.

That being said, the left usually doesn’t accept the answer of ‘well yeah, your parents were screwups and that sucks, but it’s not society’s fault’, so I think we will see a push for equity in credit scoring.

As someone who personally got to their mid 20s with no credit history and has found out the hard way that the only way to build a up a pillar of a good score is to wait a decade despite excellent income and perfect payments I certainly think some improvement can be made. Does the credit history past a year or two really capture anything besides who's parents had the foresight to open a card in their name as kids?

Age of credit lines is only like 15% of the fico score. You can have a pretty good score two years after opening your first card (I didn't have a credit card until college).

besides who's parents had the foresight to open a card in their name as kids?

My professional worker parents didn't think to do that for me. And of course that has no negative impact on my credit. I got a credit card in college and later a vehicle loan. No lender now cares about my length of credit history. All with no parental help.

But these comments are making me wonder if later I should get my kid a cosigned credit card to scam this system.

Now you have me wracking my brain trying to figure out how I financed my first car. Bought a new 2007 Honda Civic off the lot after I graduated college. Never had a credit card, I'm not sure I was on the utilities, I definitely had been on the rent. My parents didn't cosign the loan. I do remember they made me fax them my college diploma. First and only time that ever happened.

Drove that car until a tree fell on it last year. God I miss it.

But I can easily imagine if I'd been estranged, didn't know who my dad was, just had parents who were financially illiterate/had bad credit(but I repeat), whatever. I would have had to buy a beatermobile, spend as much on mechanical repairs as I did on buying it, and then buy another beatermobile and do the same thing.

Yes, and? This seems on the surface to be implying this is an unfair outcome, but it seems totally reasonable to me. Nobody has to lend anybody money, and credit scores serve an important purpose in being a generally reliable signal that lenders will get their money back. At one point I remember reading part of why they were so reliable was how they were calculated was a trade secret, so that people couldn't game them. I'm not sure this is as true as it once was, with it being open knowledge that credit utilization and payment histories have a huge impact.

Anyways, watching the video, it's full of all the damning by association with non sequitur you'd expect. Credit scores are racist because before they existed banks were racist. Credit scores are racist, because before they existed the personal credit system between business owners didn't include child labor or slave labor. Credit scores are racist because when black neighborhoods become cesspools of crime and dysfunction and their property value tanks, it's hurts their credit score.

I especially love the rhetorical trick they use claiming these non sequiturs actually matter, and repeatedly say "We'll get back to that later". They never do. It's basically full of weasel words and incriminating but irrelevant trivia, exactly what I've come to expect from Vox.

It basically seems like an epistemic attack on what lending even is. Not unlike how health insurance isn't health insurance anymore. It's just the monthly fee you pay to gain access to healthcare cheaper. You can wait until you get sick and then buy some, because nobody can deny you for a pre-existing condition anymore. It takes all the hard work of actuary tables and managing risk and flushes it down the toilet. No wonder costs have spiraled completely out of control and you see companies pulling out of certain markets entirely.

And likewise with lending. When they decide everybody is entitled to sub 5% lending for education, mortgages, automobile loans, etc, I promise you the costs will spiral out of control for everyone. And then everybody will be worse off, and we may find ourselves right back to an objectively worse era of lending by personal reputation.

Then again, knowing the sorts of duplicitous fucks that push these policies, they probably just think it's going to hasten an inevitable communist revolution.

This seems on the surface to be implying this is an unfair outcome, but it seems totally reasonable to me. Nobody has to lend anybody money, and credit scores serve an important purpose in being a generally reliable signal that lenders will get their money back.

The problem is that that the absence of a credit history, instead of meaning something neutral or slightly benign (this person has always been able to afford smaller purchases, so he/ahe should be able to repay this loan), causes the lenders to reject the application. It's obvious that someone who has struggled to repay their loan for a 50" TV is a bad candidate for a mortgage loan, but someone with a blank credit history, but a stable income and no real red flags like arrests shouldn't be considered a risky borrower.

It's obvious that someone who has struggled to repay their loan for a 50" TV is a bad candidate for a mortgage loan, but someone with a blank credit history, but a stable income and no real red flags like arrests shouldn't be considered a risky borrower.

But they are. According the numbers, anyway. And it certainly makes sense that someone who has been borrowing and paying off loans is less of a risk than a similarly situated person who has never borrowed anything.

America doesn't have well-enforced unique identities, so there is a high risk that someone past their early 20's with no credit history has fraudulently adopted a fresh identity in order to conceal their uncreditworthy past. Lenders don't want to touch that with a bargepole.

It is not particularly credible that the bias against people with no credit history is about actual identity theft.

America doesn't have well-enforced unique identities, so there is a high risk that someone past their early 20's with no credit history has fraudulently adopted a fresh identity in order to conceal their uncreditworthy past.

"Please don't deadname me, it's very triggering."

Joking aside, the Tories brought in a bill which would close the loophole of convicted sex offenders being allowed to change their names if the reason they wanted to change their names was because of a newly discovered trans gender identity. Coming out as trans in order to distance yourself from a shameful criminal history is one obvious ulterior motive, but I wonder if anyone's done it for the comparatively milder reason of covering up their history of writing bad cheques and defaulting on their mortgage.

Now you have me wracking my brain trying to figure out how I financed my first car. Bought a new 2007 Honda Civic off the lot after I graduated college.

Depending on the economic environment, dealer financing can be VERY lax.

I interned in finance at Ford. The dirty secret is that nearly-new sales through franchised dealerships are a key part of the business model (effectively as a form of price discrimination between the idiots who happily new prices and the price-sensitive customers who want a new-car quality car but without paying the premium), so a dealer is relatively happy to repo that car in a way a bank isn't. So they care less about creditworthiness as long as you have a down payment that covers the difference between the "new" and "nearly new" valuations.

I would love to read a "how not to get screwed at the dealership" post from someone who interned in finance at Ford. You're in a unique position of being both a noob and an insider and that perspective is pretty rare.

I wouldn't know - partly because Ford corporate try very hard not to know the details of how their dealers are screwing retail car buyers, but mostly because the stuff I did learn about the car market was specific to the UK in my youth.

The core fact about the UK car market in the late 20th century was that most new cars were sold to fleet buyers. The reason for this is that, as long as you drove at least 2,500 business miles a year, you qualified for relatively favourable tax treatment on a company car. For most of my youth, my mum did the school run in my dad's company car while he commuted to work by train - and this was completely normal for the middle class. In order to market to fleet buyers, the list price (dealers normally paid 90% of list as in America) was inflated - making the fleet buyer feel he had got a better deal because he negotiated a 12-15% discount. (The way the cost of the discount was split between corporate and the dealer who handled the face-to-face aspects of the sale was the subject of brutal negotiations, and one of my tasks as an intern was to access the computer system that the middle managers didn't understand and pull a list of all fleet discount disputes that had been outstanding for more than a year, and then walk round the accounts receivables department telling a whole bunch of low-end white-collar drones who were mostly 10 years older than me that if they didn't know how to put an update on the system then they had better let me do it because their grandboss was going to be Noticing in a few days' time.) So in the 1990's UK, "How not to get screwed at the dealership" was basically "Never enter a negotiation where the starting point is the list price." The easiest way to do that was to buy nearly new.

Some of this came up in our antitrust training - there was a competition enquiry going on while I was at Ford about why new car prices excluding tax were higher in the UK than in Continental Europe, and we had to learn what we could and couldn't say about it. The official reason was:

  • We don't update prices instantly in response to exchange rate moves, so there is a temporary effect where the strong pound pushes up UK prices.
  • Manufacturers absorb part of the new car tax, so pre-tax prices were lower in countries with higher taxes. The real reason was the point about fleet buyers.

Actually motteizean AMA posts seem like a really interesting thing we could potentially have on the front page in general.

One thing I'd add is that past examples like good advice or straight up having the cash to assist with certain major purchases, parents can further advantage their kids. They add their underage children (or of age, but that's less relevant) as an authorized user to a specific credit card. Paid in full, on time, utilizing ~7-15% of limit, and increasing limit every 6 months-year... kid could reach adulthood with a perfect score and many years of reliable history.

This knowledge is becoming more common in various different populations- my upper middle class friends' parents who worked in accounting/finance did this for their kids about 20 years ago (mine did not), but I recently had an uber driver who had been doing this for his teenagers.

I expect as underage credit building becomes more common, young adult scores will become less indicative of ability to pay, though I imagine fuckups will ruin their own scores quickly enough for the system to correct things. I expect said fuckups will be a central example of how credit is a privilege based system, though it's more of a loophole exploit that didn't substantially exist for most of the system's history.

I had an AP civics teacher tell every kid in his classes this. Midway through college I had an massive credit score and the bureaus showed me having 30 years of history (?!?).

Gotta trust your kid enough not to be a dumbass though.

I hadn't even considered the possibility of yet-born kids being added for credit purposes (I have contemplated descendant trusts at length). Dunno about authorized users requiring SSN or not.

This doesn't give you a perfect score as your history only has a single credit type, but it does give you a very good score.

However based on the very small sample of people whose detailed financial history I've seen the apple doesn't fall far from the tree regarding credit factors.

This doesn't give you a perfect score as your history only has a single credit type, but it does give you a very good score.

You don’t need a perfect score, you need above 680(or well into the 700’s if you want to get a better rate).

You're absolutely correct that no credit mix = no 850, the actual perfect score.

But my understanding is that above 760 there aren't any better rates or other perks, it's just a nicer cushion.

Auto loan is certainly possible with parental cosigner.

Mortgage is kinda wacky but could be done with parental cosigner with the kid still living with parents but landlording to pay mortgage. Down payment on a house would certainly be worth more than covering tuition at most colleges/most subjects, even if housing is in a bit of a bubble and rates are ass.

They add their underage children (or of age, but that's less relevant) as an authorized user to a specific credit card. Paid in full, on time, utilizing ~7-15% of limit, and increasing limit every 6 months-year... kid could reach adulthood with a perfect score and many years of reliable history.

I taught a middle school personal finance class for a credit union a while back, and the advice was basically this, or to at least get a credit card at 18, even if you don't need it (especially when you don't need it!) use it a bit, and pay it off in full each month.

At the same time, the American finance system seems reasonably lenient on young people with steady jobs. I walked into a car dealership with no credit but an annual work contract, and walked out with a decent car. The interest rate wasn't great, but it was in an era of very low rates, so I didn't notice that much. This was financed through the (used) dealer, and it might be much harder for someone with no credit history to finance a car they found online. As it probably should be? Many people are unable to evaluate cars on their own, independently of general trustworthiness.

Mortgage credit in the US in particular is very weird became almost all loans are insured by quasi-governmental agencies, and they have a very simple cut and dry rule for the insurance fee. You have FICO, you have LTV, you find where you are on this prescribed grid and that’s how much it costs. It’s already subsidized, it’s already not a market price, it already doesn’t accurately reflect the underlying risk, and this is all sort of on purpose because it’s one way the government wants to encourage homeownership. Messing around with this stuff on the margin is sort of second order compared to the fact that this entire edifice occupies 80% of the mortgage market.

Also that mortgages are widely priced off FICO scores despite the fact that Fannie and Freddie both have in-house credit scoring models which are more accurate for mortgage lending than FICO, which is designed for unsecured lending.

Yep and the crazy thing is it isn’t that complicated to use the better model.

The weird thing is credit scores are not really how banks make major decisions on lending (that has more to do with cash flow)

They are for consumer stuff though. What are you gonna do, some huge financial analysis for every guy who walks in wanting a credit card or mortgage?

Basically all you need is (1) cash flow (so income) and (2) negative credit history. That’s it. Wouldn’t be a huge financial analysis.

Edit: you also what to value the asset you are loaning on + make sure you understand if there are ballooning other payments.

However, it does not seem to me like people holding the opposite view are obviously delusional the same way as progressive attitudes towards crime are.

No, but they're still wrong. If they were correct, one would expect blacks to have a lower default rate, given their credit score, than whites. This is not the case.

Well yes, blacks have lower credit scores because they’re worse with credit, and they’re worse with credit for the usual reasons. But ‘blacks lack advantages that most whites have and that’s the main reason for lower credit scores’ isn’t just laughably wrong or insane- it’s totally a thing that could happen. We just don’t live in the world where it does, and it’s a hard assertion to disprove without crimethink.

"Not laughably wrong or insane" is simply not sufficient reason to believe the story. There's always some just-so story as to why some progressive-favored group is actually doing worse through something that's actually the fault of the evil white male or society or anything other than their own. And every time people come up with evidence that casts doubt on the just-so story, the just-so story just moves into any remaining gaps. And/or the evidence is suppressed.

Blacks have lower credit scores because they engage in activities that result in lower credit scores. Furthermore, black credit scores either correctly reflect or underestimate their credit risk. There's nothing to correct or compensate for, except on the part of black people themselves.

In my model, people buy vehicles outright with their savings. I get that it's not 1955 anymore and kids can't buy a decent car from a high-school part-time job any more. Cars are more expensive than they used to be, better too.

But I've seen all kinds of advertisements for buy-now-pay-later and other kinds of financing on furniture, clothing, even food. I think it's rather dystopian seeing financing so prominently in culture. Does nobody in the US have any savings or liquid wealth anymore? I assume people here do but people here are special, the WEIRDest amongst the WEIRD.

Apparently 40% of Americans would struggle with a sudden $1000 payment. Only 46% of young Baby Boomers could manage it, despite having decades to build up their wealth. https://www.cnbc.com/2021/01/11/just-39percent-of-americans-could-pay-for-a-1000-emergency-expense.html

But I've seen all kinds of advertisements for buy-now-pay-later and other kinds of financing on furniture, clothing, even food.

Patrick McKenzie (tpot adjacent finance tech guy @patio11) had a pretty good Bits About Money on BNPL almost a year ago. They're not quite as insidious as you would think.

For WEIRD points, I pay for basically everything via credit (gaining reward points and risk protection less available by other means) but zero out the balance every month. As pointed out by the survey I'd be one of those who would "struggle" since I'd pay it by card despite having more than a reasonable amount of liquid wealth. I should probably park more of it in less liquid investments.

A few years ago I went to a Toyota dealership to consider purchasing a vehicle. I prefer used, but my wife insisted on new, so there we were. The dealership had a large maybe 7' tall propped up giant poster explaining that you could trade in your previous vehicle that you hadn't paid off and they would pay it off for you. They then would roll your remaining balance into a new loan with the additional balance for your new financed Toyota.

So it is a scheme to get you very indebted to Toyota finance with a second order loan.

Also sometimes Amazon has an option to pay for things over the next few months on credit.

Retailers get that giving you credit is the real way to sink their claws into you.

Retailers get that giving you credit is the real way to sink their claws into you.

If it's zero interest and you're responsible there is not reason not to finance everything at 0% interest. I understand this is bad advice to dumb people who are not responsible but I've done very well just off inflation before opportunity cost into investments for financing many things.

Yes, the credit card issue. Conscientious people farm good credit scores by auto-paying their credit card debt off every month. It's free credit one month at a time. Or a few months at a time for furniture, etc. Time value adjusted $20 bills are lying around waiting for you to pick them up. Unless you are sort of low conscientiousness.

So credit companies rake in billions for the trivial price of constantly giving a few conscientious people free monthly microloans.

But it isn't actually "free" because the fees charged to merchants are passed on to the consumers. If everyone uses credit cards, everything costs more. (2% perhaps? Too lazy to look it up.) It's just hidden from you. The credit card companies aren't charities.

I could go on about how the agreements that merchants have to charge the same price to cash and credit customers are an abusive monopolistic practice, but not now.

Apparently 40% of Americans would struggle with a sudden $1000 payment.

They run that survey every year, and they misrepresent it every year. They did not ask if someone would "struggle", they asked how they would pay it off. Not how they could pay it off, but how they would.

But I've seen all kinds of advertisements for buy-now-pay-later and other kinds of financing on ... food.

It took me a couple of years to notice how odd "school lunch debt" (and the stories about students facing consequences for unpaid debts) was. Who is extending students school lunch credit? Who is issuing the school lunch loans? Do students have to go through an application process that checks their creditworthiness?

Back when I was a kid, school lunches were free for anyone willing to fill out a form. Two different people at my high school said they got free lunches due to their parents falsely claiming financial stress.

That Aramark minimum-viable-product-food only fit for prisoners and public school students is free for the end user. Enjoy your free tiny rock-hard apple, slice of """pizza""" and tiny carton of fat free milk. My wife's description of school food in a communist country is so much better than what I recall growing up in privileged middle-class American suburban public schools.

No, the students are over drafting their school lunch accounts, usually by buying candy and Gatorade and the like, because the cafeteria knows they’ll more than likely get it from the parents(the ones who won’t pay are like 90% on free and reduced lunch).

Back before you could use lunch accounts like that, I used to loan shark other kids at the lunch table offering dollars for vending machines at flat 25¢ per day interest rates (within a class/social circle that virtually guaranteed repayment out of allowances). The market was always there to be exploited.

BNPL is a pretty good deal- it's a 0% loan. I've got plenty of savings and even I've been tempted to sign up, but ultimately I'm just too allergic to debt and monthly payments. Used to be that you could get a car loan at 0%, too. That was a phenomenal deal.

Apparently 40% of Americans would struggle with a sudden $1000 payment. Only 46% of young Baby Boomers could manage it, despite having decades to build up their wealth.

"Struggling" here includes people who would have to dip into retirement savings or something along those lines. It's not just people who are literally penniless.

Actually, I wonder what is the math on BNPL vs credit card rewards of 2-3% on average? There is some combination of time and interest rates that would make Klarna optimal.

I don't know if the amount of money to be gained is high enough to ever make my timr worth it, but I would happily let an app optimize my spending and then take a share of the profits from not blindly using credit cards.

It's not either or, right? You can put the klarna payments on your cc.

Oh dang. I never used klarna so had no idea. I figured retailers were okay with klarna because klarna gave them lower fees than card processors. There seems to be a fair amount of free money to pick up here at 5% money markets if you can figure out how to be time-efficient on exploiting.

There’s also the option of not needing specifically credit history to get a loan or further credit, if you have other financial info available. For example, in Israel you can get a loan from your bank based on your salary income, which is known to your bank anyway.

What are personal bankruptcy laws like in Israel?

A lot of non-US folks express surprise at US credit systems but when I look into their banking laws personal bankruptcy is extremely difficult to qualify for, it's very easy in the US to have all your personal debts discharged.

I honestly don’t know enough about either sets of laws to draw any meaningful comparisons.

it's very easy in the US to have all your personal debts discharged

Used to be before bankruptcy act reform. Now unless you have no assets and no job they force you into "voluntary reorganization" (debt slavery).

Can you tell me more about this? Googling it just brings up links to legalese on government websites.

https://www.investopedia.com/terms/b/bapcpa.asp

Consumer credit access and rates in the US are typically determined by a combination of credit score, loan to value (how levered the asset is), and debt to income (how manageable are the debt payments relative to how much you make).

As far as I'm aware, in the EU, income stability is in general a much more important factor (often the only real factor) than credit rating except for negative events.

You can do that with credit cards in the US, with your credit limit usually scaling with income. Of course the interest rates on credit cards are much higher because it's basically for people who can't get a loan otherwise.

There are of course better credit cards for people who are more responsible with credit, and those tend to come with points/cash back, not a lower interest rate(although there are lower rate cards available for people with good credit). The real lender of last resort is those payday/title loan places, which likewise have maximal interest rates.

I’m more curious about Israel not checking default risk before giving a loan; that seems like it’s ultimately a lose-lose because you can’t get a lower rate.

They are, they're just not using positive credit history, they're using income history and negative credit history.

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On The Motte, always attempt to remain inside your defensible territory, even if you are not being pressed.


New post guidelines

If you're posting something that isn't related to the culture war, we encourage you to post a thread for it. A submission statement is highly appreciated, but isn't necessary for text posts or links to largely-text posts such as blogs or news articles; if we're unsure of the value of your post, we might remove it until you add a submission statement. A submission statement is required for non-text sources (videos, podcasts, images).

Culture war posts go in the culture war thread; all links must either include a submission statement or significant commentary. Bare links without those will be removed.

If in doubt, please post it!


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