Theoretically, credit should be used for one thing: to make more money. (not less)
However, instead of using it to buy or construct a machine to triple what you can produce in an hour, the average person is using it to delay having to work that hour at all, in exchange for having to work an hour and six minutes sometime later.
At some point, you run out of hours available and the house of cards collapses.
i.e., credit can buy time in the nearly literal sense, you can do an hour's work in half an hour because the money facilitates it, meaning you can now make more money. If instead of investing in work you're spending on play, then you end up with a time deficit.
or, e.g. you can buy 3 franchises in 3 months instead of 3 years (i.e. income from the 1 franchise), trading credit for time to make more money, instead of burning it. It'd have been nice had they taught me this in school.
The "average person" is told from birth to consume as many things and experiences as possible as it if was the only thing that could give their life a meaning. The entire system is based on growth and consumption, I have a hard time blaming "the average person"
I acknowledge that such telling exists, but there is still responsibility for people choosing to listen to it. Skepticism is vital. Beyond being skeptical of what you see, it is wild to me that we don't have approximately everyone blocking all ads, cable news, most social feeds, and other such transparently manipulative shit. Advertisement especially is literally industrialized and research-based psychological manipulation to make people do things that make no sense (see what Alfred Sloan did to GM, for an early example) — it's toxic and should be absolutely avoided.
Wages for the average person (working class) typically remain stagnant while cost of living increases, particularly through inflation. I imagine minimum wage would be 25-30 bucks an hour if it did track inflation and that would only serve to keep your purchasing power constant.
Credit, in this sense, is also used to solve a cash flow problem. It’s a bad sign when that credit (or Klarna Pay-in-3 style setups) is applied to basic day to day expenses like buying groceries or other necessities.
Basically the market’s answer to increasing poverty: you’re not getting paid more, so how about we give you a payment plan to spread things out?
I find meaning in understanding ever so slightly more about the world we live in, and so I love consuming as many things and experiences as possible to have a rich understanding of myself and to some extent, humanity as a whole.
I don't like the word "consume" though. Am I consuming a surfboard or am I surfing? am I consuming a song, or am I listening to it? singing along to it? This perspective feels tired.
The entire system (evolution) is based on growth and consumption. Blame agriculture! Too much free time to consume now – we are full-time entropy farmers.
It goes beyond that when there's installment payments for burritos being paid. It's not just being brainwashed into consuming too much beyond what they should and more like a systemic problem that pushes people into not being able to easily afford daily food, yet still needing that to get enough time to work and commute.
Believing what is told, trut all what is told, is something to be blamed about (here I am assuming we are talking about adults). Not like blame was allocated here, just since the topic was mentioned.
> The "average person" is told from birth to consume as many things and experiences as possible as it if was the only thing that could give their life a meaning.
The “average person” doesn’t make enough money to pay rent or afford groceries. You’re blaming the poor based on your idea of what an “average person” looks like, which is a representation of middle and upper middle class. The average person doesn’t have the luxury to consume as many things and experiences as possible.
There is no “system.” It’s all just people making choices. My wife puts straws in the dishwasher to reuse them. She grew up in America the same as everyone else.
> Theoretically, credit should be used for one thing: to make more money.
I disagree.
You use credit to buy a car or buy a house when you don't have the cash to buy them up-front.
It's not so you can use them to make money, it's so you can use them to enjoy life.
> At some point, you run out of hours available and the house of cards collapses.
Only if you go too far. The point is to buy things knowing what they'll cost monthly and for how long, and to budget those as part of your monthly expenses. As long as you can always handle those, you will never run out of hours available and it's not a house of cards. Nothing collapses. You pay off your car; you pay off your mortgage.
You seem to be treating this as something black-and-white when it's not. It's an incredibly useful tool when used with budgeting. Not "to make more money" but to have a better life for you and your family for when it matters the most. Nobody wants to wait until the kids have graduated from college to be able to buy their first house.
And even with credit cards -- yes you generally want to be paying them off in full monthly. But if you want to take a vacation a couple months before you could otherwise fully pay for it, it's really nice to have that convenience too. Not to mention covering some expenses for a few months if you lose your job. They're a tool to be used responsibly.
If you're using credit to buy a car, most people do so in order to get to and from their place of work for the majority of their driving time. In that way, using credit to buy a car still fits into their theoretical model. For example I know plenty of people who completely got rid of their cars when remote work became more common, or at the very least consolidated to smaller cars or to less cars for a family.
Similar thinking for a house. A lot of people when buying a house go into it with the assumption that it is an appreciating asset that will gain value over time. Yes there are other factors of course like wanting to live closer to schools or in the suburbs/good areas, etc. But regardless this is commonly to facilitate a life that lends itself to you continuing to be able to make money comfortably.
Regarding vacations, no financial expert recommends using a card without the intention of not paying for it. If your plan is to book the vacation on credit for anything other than the benefits of your credit card points systems you might as well not use it at all. And all recommend not using credit cards and instead an emergency fund if you lose your job.
I used to hate to take the position that government should save people from themselves, but I've moderated a lot on it. Some people clearly cannot use credit responsibly.
> You use credit to buy a car or buy a house when you don't have the cash to buy them up-front.
Still the same principle - you buy long-term asset that makes rent-equivalent money if you rented that otherwise. That is different than borrowing for immediate consumption.
> > Theoretically, credit should be used for one thing: to make more money.
> I disagree.
> You use credit to buy a car or buy a house when you don't have the cash to buy them up-front.
There's no contradiction with GP here.
Financing a car or buying a house on mortgage might well save somebody money in the long term (e.g. by allowing them to take on a job to which they have to commute by car, or saving on future rent payments).
If that's the case (and that highly depends on individual circumstances), this still counts as "making more money" – via spending less money.
The real question is: How do you feel about borrowing money used to buy depreciating assets or consumables?
Let’s say you finance $40,000 in auto debt over 5 years. With a low interest rate of 6% paying $6,300 in interest. That’s over 15% of the amount borrowed! Many people have lager rates over longer periods.
Now consider what would happen if you invested that $6,300 for 30 years instead of spent it on interest. You’re losing out on tens of thousands of dollars in total lifetime wealth.
When you borrow money to “enjoy life” it can quickly end up costing 2x what it would if you spent the money outright, even if you borrowed at low rates.
Do you also think that way about buying a house with a mortgage (credit)? I don't.
A mortgage isn't used to make more money. It's used so people can own a house after saving for a few years, rather than waiting until they've saved for a few decades.
A mortgage doesn’t make money, but it (can) enable spending less money. If you buy a place such that interest, maintenance, insurance, taxes and the opportunity cost of not being able to easily relocate are less than rent, then you have saved the difference.
It’s also a way to force saving, which is psychologically useful (and thus valuable).
I bought a house when I did because the interest on a mortgage was lower than any reasonable prediction fir inflation, which seemed a lot like free money; but at the time it felt a lot more like a dirty hack taking advantage of terrible government policy than any idealistic system where credit is used to bootstrap productive capitalization.
Shelter (and, for many, transportation) are a need for maintaining their ability to make money. As such there is some minimum amount that must be spent on these, and loans costing up to that amount can be seen as ways of making money. Most people who make these purchases do buy even more than strictly necessary, and the extra spent above the strictly necessary line should be seen as luxury expenses.
General advice for homes leads to buying a home that does follow the logic, given historic movement of home prices and rental prices. It rarely is put in those terms, but works. For vehicles, the financial recommendation generally is to buy less car as it is a depreciating asset. If you have cash for a luxury expense, then it is no different from any other large luxury purchase, but if you have to finance, go as cheap as possible (but making sure to account for the repair costs, fuel usage, and such, not just the initial cost and loan payments).
You need to compare money paid for mortgage minus price of house against money paid for rent (when you're left with no assets after all the years of paying it).
I do. Housing prices are constantly rising, when you take a loan you are buying an asset which (with some luck) may appreciate in value more than mortgage interest rates. That's why in some countries it's worth taking a loan as soon as possible without saving for too long.
Sure, without mortgage you may not be able to afford a house at all but it does not change the fact that mortgage is a "good" loan (i.e. you benefit from taking it)
For a lot of folks, credit is the only way they're surviving on something close to minimum wage. Or credit was the only "safety net" they had during a rough time. Almost none of these people have the kind of collateral needed to use credit to truly transform their lives, and the government assistance for that is seriously lacking in the US (SBA loans are terrible, and you need enough money to cover your own salary until your business gets up and running).
> credit is the only way they're surviving on something close to minimum wage. Or credit was the only "safety net" they had during a rough time
In my experience, the average American has no concept of saving money, and those below average even less.
It's funny to me that America gets flak from all over the world for having no social safety net; if this was actually true, you'd expect to see people put aside a bit of their income, however meager it may be, out of an expectation that they will need it. What do you see in practice? You see people dashing over to the nearest rent-to-own rims shop. (If you don't know poor people, you may not know such businesses exist.)
> Almost none of these people have the kind of collateral needed to use credit to truly transform their lives, and the government assistance for that is seriously lacking in the US
I doubt that greater availability of credit, perhaps facilitated through government subsidy, is what precludes the majority of such people from transforming their lives.
You can't really survive on that. It's a snowballing situation. It's perhaps a strategy to avert impending catastrophe but it's like pitching an airplane down to gain speed when the engine is stalling. If it gets you to restart the engine the brief nosedive may let you survive, but if you have to keep turning the nose more and more vertical, the you're gonna meet the ground.
Not sure what you mean by the “average person” here but the biggest kinds of debt are mortgages ($12T) and cc debt, student loans, and car loans (roughly 4T total).
Is your position that taking debt to buy a house is bad unless you can sell it for a profit? Is working for the mortgage lender to accomplish that not worth it?
You can avoid it by renting, but then you’re just working for the landlord, so there’s no avoiding it.
Every single thing you mentioned outside of cc debt (though arguably you should never reach for a credit card outside of using it for the points systems they provide) could be categorized as something used as a tool to make more money.
Space is expensive because of mortgages. If nobody could get a mortgage, nobody would need one. It's a race to the bottom.
Buying a home from a landlord is still working for a landlord; you just pay the present value of future cash flow in a single lump sum, like an annuity.
I tried using one of these offering a 0% intro APR to finance an upgrade to the boat I eventually moved into (saving me 10s of thousands in rent.) They wouldn't let me do it despite having an upper 700s credit score.
It's not clear to me how they pick people to lend to.
Yeah a high credit score isn’t what that lender is looking for. They don’t make money of people who actually repay the loans, indeed they tend to loose rather a lot (cost of capital + cost of account admin).
If someone is offering you a 0% APR loan, it’s either because they’re hoping you’ll move your loans to them, and become unable to leave once the 0% period has ended. Or they’re trying to sell something else (either more of something, or the same thing at a higher price), and want use consumer debt to artificially increase market demand.
You upgrading a boat, so you can save money in the long term, is literally the opposite outcome they’re looking for here.
0% intro APR offers are somewhat predatory in that they rely on a large portion of people keeping a balance after the intro period in order to be offered, or at least building a relationship with other financial products. It wouldn't surprise me that they would reject someone in the high 700s, they might have been looking more for people in the low to mid 600s.
There's also a lot of reasons one might be rejected for a credit line that have nothing to do with credit score. Some lenders have specific policies in addition to credit score, like Chase's 5/24 rule. Some are also just looking for "relationships" and won't offer you their best products unless you have a bank account with them, etc.
If you really believe the only responsible use of credit is to buy productive assets then this is a tautology. As soon as anyone uses credit buy productive assets they cease to be proletarian and become part of the capitalist class.
One flaw with this reasoning is that ignores the time value of money. A dollar today is worth more than a dollar a hundred years from now, if only because we’ll all be dead a hundred years from now. From that perspective and with favorable terms it can make sense to sell the future to buy the present, if someone is willing to take that trade.
People living paycheck to paycheck need (in your "franchise" language) food and basic clothing as opex for their human capital, and possibly even entertainment, something that is provided to our troops. Trust me the military would not allow for leisure time if they did not think it had a purpose. Eating enough food and wearing a shirt without holes in it does let people make more at work.
There are at least as many ways that this can be finished accurately (for some theory) as there are theories of what should guide human behavior, generally. But this one:
> to make more money.
Is really more apt to theories of appropriate behavior for arms-length business organizations whose only shared interest among their owners is profits than the common ones for individual people.
No, an average person uses it to improve liquidity atop overall solid fundamentals. Literally hundreds of million people worldwide do it with no adverse effects and improved quality of life. Irresponsible people are relatively a minority (although they tend to make the news). And aversion to financing is in itself a poverty marker more often than not.
Of those who carry credit cards in the US, 60% of them carry a balance [0].
There are also all those reports that have come out about how nearly 40% of Americans don't have $400 for an emergency [1], with the median being just $600.
If the rule of thumb for an emergency fund is 3-6 months of expenses, and we can agree that paying interest on a credit card is a bad finical decision, then I'm not sure how the "average" person has solid fundamentals, where credit cards are being used as a strategic tool.
People also tend to spend more when using credit cards [2], which negates most benefits someone may get from using credit card for the points. So even those with solid fundamentals, who are using it as a tool, are probably still losing, just in a less obvious way.
This is so wildly qrong I dont know how to start. Im assuming this person is not in America, where a lot of the population (unfortunately) uses these practices to buy things that are needed/non-essential) its a shell game the creditors were willing to pay. But now its a lot so its going to affect credit (which is should have to start).
This is all true if you have enough for the basics and are looking above the minimum survival costs.
Just to make the money you are making now, you need some stuff, be it a phone or a car, home AC, oven or even a washing machine at home (you can't go to work hungry in dirty clothes).
If you don't have the money to pay with cash, you'll be buying that oven/stove with whatever delayed/monthly payment option is available.
Yes, if you're buying franchises you can do the "make more money" calculations, but if your kids are going to be hungry soon, you often have no choice.
Owing money you don't have has disadvantages even without interest.
For example, if you make 5000 dollars a month and get a 5000 dollar BNPL loan for a stereo, payment due in a month, then even without interest, you now either starve or default on the loan (or incur penalties, i.e. the interest you thought didn't apply).
I looked it up, and most of the sources seem sketchy (quora, lendingtree), but they agree with your number.
I think the kicker is, the ~50% of people who don't pay them off in full every month can have a massive amount of CC debt and struggle to even make a dent in it.
I think my understanding has come to the fact that loans and interest can smooth out your financial situation: When I was single especially I had a lot of savings building, I was making interest and making money. Then when I had a kid, I end up paying that interest back, because expenses for a kid are way above what I can healthily operate in this economy, and I needed more financial products to cover that. But that's also not forever: As soon as a kid's in school and you aren't sending an entire paycheck a month to the daycare, you can establish a upward financial pattern again.
It'd be nice if kids were an affordable choice for anyone expect Elon Musk, but you know, here we are. \o/
> Theoretically, credit should be used for one thing: to make more money. (not less)
Credit moves money across time. That’s it. (Analogous to paying a shipper to move stuff across space.)
Not all consumptive debt is bad.(And not all consumptive loans are wealth destroying. I opted to borrow when I bought my car because the rate was so much lower than what I figured I could earn with the money.) And not all cash-flow positive wealth is good.
We should be more scrutinising about how debt is used. But especially for folks with volatile incomes, accumulating debt for consumption is fine as long as it doesn’t snowball.
Credit cards however, can be used to get free stuff from rewards.
Credit loans or payment plans can also be used to get a higher credit score, making the first item easier.
Conversely to your example of credit making cash,
Cash can make you money through investing, so Credit can also be used to keep higher amounts of cash on hand when purchases are made. , e.g., buying a car on credit and using the car money to invest. But we're saying the same thing there.
> It'd have been nice had they taught me this in school.
Yeah, even at a basic level, it should be made clear that cars depreciate and real estate, by and large, appreciates in value.
One of those is "good money" and the other is "bad money". Kids should learn coming out of school to be able to distinguish which of the two they are throwing "good money" at.
Eagh, real estate depreciates too, just more slowly. Imo the actual difference is that (many) cars are a very expensive way to meet your transportation needs compared to alternatives.
>Theoretically, credit should be used for one thing: to make more money. (not less)
This is prima fascia false. Credit, especially artificially low interest rate credit like this, can be used for a ton of reasons, including 'beating inflation.'
I bring this up because so many diligent savers in 2019/2020 got screwed by waiting to buy big tickets items.
Buy now pay later at 0% is what these programs offer which does not align with what you are saying at all.
Used properly these provide liquidity by spacing out payments.
Certainly there are economic concerns about not being able to afford groceries today but liquidity (especially free liquidity) isn't fundamentally worthless.
I think that's a bit disingenuous. It's not always delaying work. There's only so much time and there are some people who cannot afford to live with the time in the day, the skillset they have, and the market conditions (both income and expenses). Your tone and word choice shows you don't understand the problem at all.
If somebody can BNPL or otherwise credit lifesaving medicine (such as the many people in the USA who die from inability to afford healthcare), that's not play money because they don't want to work.
You are conflating what actions would maximize the long term returns to the individual with the status quo which is that credit increases liquidity of the average family, who has most of their wealth tied up in home equity.
I bought a boat on credit. It was the dumbest financial thing I could ever do. It was the best thing spiritually/emotionally I ever did. All of those weekends/vacations boat camping with my kids when they were young. All those times going out after work. So many experiences I would not have gotten to enjoy if I waited until I was 60 to buy in a smart way.
There is such a thing as opportunity cost. Putting dinner on a credit card is dumb. Putting a dinner on credit that ends up being a first date creating a memory and connection with your future spouse is life making. Or dinner with grandparents and kids that might not be around long.
You have completely ignored opportunity cost in your factoring. And it is probably the most important 'human' factor and is just as tied to your 'time' argument. We have 60 some rotations around a star, and stages in life during that time. That needs to go into your 'optimization' as well.
When I was in my 20s it would take me 20 hours work to earn 100 units
15 years later it takes 3 hours work to earn the same amount
If I borrow 100 units in my 20s at 4%, it cost 4 units per year
I save 20 hours work, and it costs me 4 units a year. That's 48 minutes work in year one, reducing to 8 minute after 15 years. Overall it costs an average 20 minutes a year for 15 years, or 5 hours of work, then I repay the capital which is 3 hours.
I'm really sick of this sort of look down your nose at a huge fraction of consumers type behavior. It's the same sort of stupidity that underpins the famous "surely everyone else is wrong" behavior that is exemplified by principal skinner[1].
I eat garbage by the standards of anyone who gives a crap about food and you don't see me going around looking down on everyone for wasting resources on fancy food ingredients and fancy cookware and whatnot. At the end of the day these unnecessary things bring enough perceived benefit to people's lives that they seem worth it, whether that's you overpriced LeDouchebag brand enameled dutch oven or a financing service for consumer garbage doesn't really matter. It's all a "needless" expenditure at the end of the day that people find worth it.
I've never used these services and probably never will, nor am I saying the prevalence of these things is optimal at scale, it's probably not, but I'm not gonna sit there and act like 1 in N consumers, probably hundreds of millions of people, is wrong or ignorant for using them or that I know better for not.
-shitposted from my 8yo phone while driving my $500 car through traffic on bald tires
> shitposted from my 8yo phone while driving my $500 car through traffic on bald tires
I mostly agree with you, but some of those "needless" expenditures have negative externalities when avoided. Whether that's processed foods causing heart disease and diabetes that strain public health resources, or your bald tires greatly increasing the likelihood of an automobile accident that could kill you or someone else. Your response takes an opposite extreme that none of this matters, when in fact much of it matters, but it's not like treating it like it matters makes you a better person. We need to eliminate moral value judgements from the equation, while still being reasonable.
This is what happens when interest rates are artificially suppressed. "Buy-now-pay-later" would not exist if the market were able to properly price the time value of money and wasn't backstopped by the Fed and nil reserve requirements.
OK, we'll tell the average worker who can't afford a house or a car by paying cash not to responsibly use a mortgage or a car loan, because some person on the internet said so.
And yes, I'm aware cars are depreciating assets, so spare me the lecture on financing one. I don't currently have a car loan.
Paying rent doesn't count towards your credit score (at least it didn't a decade ago when I was getting my mortgage). And it's a glaring signal of how the system isn't built for what it claims: evaluating your ability to pay obligations on time. No, the system is built to trap people in poverty and enrich the rentier class.
Landlords like the idea of incorporating rent payments into credit scores, since it adds extra incentive to pay on time. Or, phrased differently, extra punishment for failing to pay on time.
Framing the current default as a help to the rentier class is just silly.
The rentier class are indeed a major cause of stagnation and inequality in our economy, but they are innocent of this one.
This benefits the landlords for the reasons you outlined, and tenants must interact with the credit industry through additional (often predatory) means in order to build a credit history that may allow them to buy their own home. Further, landlords have an incentive against providing this positive feedback, as doing so makes it more likely that tenants would exit a relationship that is profitable to the landlord.
Have seen this first hand. E.g. tenants with a terrible credit score, but 36mo of proof on-time rent payments. They've always made their future payments (in my experience).
Is having your payments reported to a credit bureau really a benefit to you to allow you to have a better credit or is it a collection activity intended to help the creditor collect?
The reason buy now pay it later is being added, is because those lenders are having trouble collecting, so they want to add it to the credit score so there is an additional consequence if they don’t get paid. It’s a collection activity, not something that’s designed to help the payor.
Adding rent is mostly a benefit to the landlord not to the poor people.
The shitty software my landlord used to use -- the Buildium / Realpage scum -- decided to put a popup on every rent payment trying to get me to pay the Realpage scum $5 to $10 to report the rent payment to the credit bureaus.
I left the U.S. several years ago and have completely forgotten about "credit scores" in this sense. I get reminded every once-in-a-while how things that used to feel so obvious and inevitable and necessary for society to function are completely artificial.
Where are you now? And what is the system like there?
From my extremely naive understanding, obtaining credit and low rates is, in general, much easier in the US than other places. So it makes sense to me that it has “artificial” tools to help determine risk.
How do other countries handle this and provide the availability that can be found in the US?
Can't speak for every country, but in Sweden for example tax data to a certain level of detail (income by labor, income by capital) is publicly available for each citizen. Same for debts. And debts that go to the collection authority, which has a very dark name (kronofogden), are very public and somewhat worse than having to wear a scarlet letter. So credit institutes have enough of an idea of your finances to decide your rate.
Banks are required to prove their loans are affordable. They can only lend someone an amount that they can prove the borrower can afford.
In my experience, rates are not low in the U.S. They are high because high risk loans are able to be granted.
The availability of debt for things like housing and cars is very complicated, but high taxes, a high degree of education, livable minimum wages, and realistic employee rights helps increase stability and decrease risk. I don't say it to be flippant. It is more complex than even I understand. It's only to say that, given that these systems are designed artificial systems, there are multiple implementations that work under various constraints and incentives.
In some countries a credit score is a mysterious value calculated by a private company based on patterns of consumerism and money usage that greatly affects your life. You must earn the score through engaging with other private companies, to the company's profit. This is why in the US & UK people get credit cards early, to improve their score whilst trying to avoid the debt trap.
In Scandinavian countries there are registries of your income (from the tax authority), your debts (including buy now pay later which are technically flexible loans) and any bad debts you have that have gone to debt collection. No history of previous balances, repayments, how long you've had a credit card, etc... Companies use this to come up with a score, either themselves or a company like Bisnode will do it for them. So basically it's a simpler calculation based mainly on current situation than history.
You can have debts totally only up to a certain percentage of your income. Banks require that you produce a monthly budget demonstrating that you have a certain amount left per month after all expenses and debts are paid. You have to be able to prove this by giving them access to your tax and financial records. Most rates for things like homes and cars are consistent from bank to bank across the country.
Society itself is completely artificial. Money, property rights, laws, taxes, even the words I'm using to write this very comment... all of these are just human inventions, reified mythology.
It's useful to remember this when tempted to make arguments that assume there is a Right Way to do things. We are exploring a massive possibility space where components interact in non-linear ways. There isn't a right way, there is no golden path. The reality of our society is an integration of each individual experience. We build theories as abstractions of that integration in order to manage and engage with that massive complexity. It can be useful, as long as we remember that they are abstractions. When we forget that our abstractions are only abstractions, we tend to cause additional problems on top of that which we were already trying to engage.
What struck me about credit scores is that, from the outside, it seems so obviously ripe for corruption and predation. But growing up, it just felt that it was the way things had to be; how could it possibly be different?
There's no lobbying necessary, because FICO isn't a government agency, its a private company. Why we have a private company determining such an important thing with minimal government oversight is certainly a question we could be asking.
That being said, there's an innocent explanation for this specifically. BYPL is pretty new as a common type of debt (became popular in the last five years). They're putting it into FICO 10. The last time they updated FICO was FICO 9 which was released in 2014, before that there was FICO 8 in 2008... a lot of banks are still using FICO 8 or even earlier models. Banks are slow to change, and FICO moves slowly because banks don't want their models upended every year. Fwiw if the government was more involved in this I doubt it would be taken into account any faster.
Your credit score can decrease if you pay off your credit card balance or pay it down too quickly. For example, paying off the last $10k on a home loan. The score is also a reflection of your value to them as a paying customer. How much money you can make them, and how reliable you are with regular payments based on past data. These types of businesses may seem off, but if the customer is reliable and makes you money, assigning a low score based simply on the business type is a recipe for litigation.
That is true when you close an account (like paying off the last $10k on a home loan), but I don't think that is correct when paying a credit card down to a $0 balance and leaving it open.
The reason is that your credit score is impacted by both your available credit (higher is better) and credit utilization (lower is better). When you pay of the last of a home loan and close that account, your available credit goes down and your credit utilization goes up (assuming you had any other debt). Both of those hurt you. When you pay the credit card down to $0 and leave it open, your available crediot stays the same and your utilization goes down.
> Your credit score can decrease if you pay off your credit card balance or pay it down too quickly
It can have a short term impact, sure, but long term (a few years), your score will be fine. I paid my last student loans years ago and I did see a sudden score drop and not I'm sitting right below 800 with no debt.
It's crazy how many things that require credit are on a self report basis. And the only time they actually report is for a past due debt and not successful payments.
They also didn’t destroy people’s credit when they got upside down and had to return the $5k couch or $15k car they were talked into buying on their fixed income, but that’s usually “other people” problems.
What's interesting here is that normally BNPL only does a soft check.
I wonder if this is going to change.
Equally, I find it weird that companies can ding your credit for not paying but have no obligation to report on-time payments. It should be both or none.
Technically it is largely already built in as an assumption that payments are made on time. You also don’t lend to a friend you will not be paid back by, will you? The credit score reduction is merely a diversion from norm, i.e., the expectation that you pay what you agree you owe.
Ironically, there is actually zero reward for being a reliable person, there is only a punishment for being an unreliable person; and with all the money printing, even the punishment for being an unreliable person has been almost totally removed and being reliable and upstanding is effectively a punishment since you don’t get to live like a king on a shoe string and then declare bankruptcy and have credit extended to you immediately afterwards because money is cheapened and consequences are void.
> You also don’t lend to a friend you will not be paid back by, will you?
I don't lend to friends and family. It's not worth losing those bonds over. I'll help financially where I can, and I'm not going to stop anyone paying me back, but I'm assuming that money is just gone.
It probably makes sense to do so. Not that I condone the FICO hustle. But small loans can add up quickly and delinquencies need to be measured for financial market stability.
The worst part is that it will equally affect all the responsible people when it blows up just like it is affecting them now when BNPL is just one more way in which demand is artificially created that drives up prices.
Yes it's a bit odd that the article poses the question if this will help or harm credit seekers. The point of the system is to provide transparency.
What does need to happen however is that these inputs are properly weighted such that those using FICO can make appropriate decisions. Similar to credit cards, numerous BNPL-purchases do not necessarily indicate that the debtor is in financial trouble. They could merely be using the services for the other conveniences they offer. Whereas seeking numerous loans is usually a negative metric.
Does anyone else live in a place where there isn't a visible "score" for how valuable you are, but rather only a "credit check" for how risky you are, which is performed if you apply for new credit (buying anything with an invoice, getting a credit card, or taking any other kind of loan)? Meaning that if you have a good income and no history of failing payments, you are basically passing the check with flying colors, and will have the same "score" as someone who has had tons of well-served credit before?
This thing where the score as in "risk" and score as in "business opportunity for lenders" is intertwined, and creates weird incentives for consumers, is that only a US thing or do any other countries have something similar?
Credit scores aren't a score of how valuable you are, they're a score of creditworthiness or how unlikely you are to default on a loan. The largest factors are age of credit and payment history. Utilization is also a factor. Someone who occasionally misses payments and has high utilization is going to be more profitable but higher risk to lend to.
Just because that’s what a scores is designed to do it doesn’t mean that’s what businesses use it for downstream.
The fact people always debate what a credit score really means suggests that there are too many factors rolled up into a single number when we should really have a few distinct sub-scales. Anybody that has made a dashboard for a ceo with a short attention span that refuses to deal with nuance and just wants to see “a number” knows this problem all too well
Credit scores in the US function similarly to this risk assessment you describe, with the caveat that there is no standard way to measure risk without a credit history. In my experience, it does not take very long to establish that baseline, and there are inexpensive vehicles to do so, such as secured credit cards. Small-scale lenders are likely to accept alternative documents like income statements or proof of payment history to qualify. FICO scores, as imperfect as they are, merely simplify the risk assessment process.
I suppose it may be related to the overall "looser" grip on who exists, and what counts as collateral. If I "default" on a loan, the lender is still pretty safe to get back most or all of it, since any loan is secured by my future income. So there's not as much need to prove my credit history - my income is public and always was, and my future income is collateral for any loan, including mortgages if my house is suddenly under water in a recession.
That means that barring any failures to service credit in the past, I don't need a history of successfully servicing credit in order to get credit.
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However, instead of using it to buy or construct a machine to triple what you can produce in an hour, the average person is using it to delay having to work that hour at all, in exchange for having to work an hour and six minutes sometime later.
At some point, you run out of hours available and the house of cards collapses.
i.e., credit can buy time in the nearly literal sense, you can do an hour's work in half an hour because the money facilitates it, meaning you can now make more money. If instead of investing in work you're spending on play, then you end up with a time deficit.
or, e.g. you can buy 3 franchises in 3 months instead of 3 years (i.e. income from the 1 franchise), trading credit for time to make more money, instead of burning it. It'd have been nice had they taught me this in school.
The "average person" is told from birth to consume as many things and experiences as possible as it if was the only thing that could give their life a meaning. The entire system is based on growth and consumption, I have a hard time blaming "the average person"
Credit, in this sense, is also used to solve a cash flow problem. It’s a bad sign when that credit (or Klarna Pay-in-3 style setups) is applied to basic day to day expenses like buying groceries or other necessities.
Basically the market’s answer to increasing poverty: you’re not getting paid more, so how about we give you a payment plan to spread things out?
I don't like the word "consume" though. Am I consuming a surfboard or am I surfing? am I consuming a song, or am I listening to it? singing along to it? This perspective feels tired.
The entire system (evolution) is based on growth and consumption. Blame agriculture! Too much free time to consume now – we are full-time entropy farmers.
People still have agency and so are responsible for their decisions.
The “average person” doesn’t make enough money to pay rent or afford groceries. You’re blaming the poor based on your idea of what an “average person” looks like, which is a representation of middle and upper middle class. The average person doesn’t have the luxury to consume as many things and experiences as possible.
I disagree.
You use credit to buy a car or buy a house when you don't have the cash to buy them up-front.
It's not so you can use them to make money, it's so you can use them to enjoy life.
> At some point, you run out of hours available and the house of cards collapses.
Only if you go too far. The point is to buy things knowing what they'll cost monthly and for how long, and to budget those as part of your monthly expenses. As long as you can always handle those, you will never run out of hours available and it's not a house of cards. Nothing collapses. You pay off your car; you pay off your mortgage.
You seem to be treating this as something black-and-white when it's not. It's an incredibly useful tool when used with budgeting. Not "to make more money" but to have a better life for you and your family for when it matters the most. Nobody wants to wait until the kids have graduated from college to be able to buy their first house.
And even with credit cards -- yes you generally want to be paying them off in full monthly. But if you want to take a vacation a couple months before you could otherwise fully pay for it, it's really nice to have that convenience too. Not to mention covering some expenses for a few months if you lose your job. They're a tool to be used responsibly.
Similar thinking for a house. A lot of people when buying a house go into it with the assumption that it is an appreciating asset that will gain value over time. Yes there are other factors of course like wanting to live closer to schools or in the suburbs/good areas, etc. But regardless this is commonly to facilitate a life that lends itself to you continuing to be able to make money comfortably.
Regarding vacations, no financial expert recommends using a card without the intention of not paying for it. If your plan is to book the vacation on credit for anything other than the benefits of your credit card points systems you might as well not use it at all. And all recommend not using credit cards and instead an emergency fund if you lose your job.
I used to hate to take the position that government should save people from themselves, but I've moderated a lot on it. Some people clearly cannot use credit responsibly.
Still the same principle - you buy long-term asset that makes rent-equivalent money if you rented that otherwise. That is different than borrowing for immediate consumption.
> I disagree.
> You use credit to buy a car or buy a house when you don't have the cash to buy them up-front.
There's no contradiction with GP here.
Financing a car or buying a house on mortgage might well save somebody money in the long term (e.g. by allowing them to take on a job to which they have to commute by car, or saving on future rent payments).
If that's the case (and that highly depends on individual circumstances), this still counts as "making more money" – via spending less money.
The real question is: How do you feel about borrowing money used to buy depreciating assets or consumables?
No it's not the only way you can use it, but it's a pretty big way that a lot of people do successfully use it.
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Now consider what would happen if you invested that $6,300 for 30 years instead of spent it on interest. You’re losing out on tens of thousands of dollars in total lifetime wealth.
When you borrow money to “enjoy life” it can quickly end up costing 2x what it would if you spent the money outright, even if you borrowed at low rates.
A mortgage isn't used to make more money. It's used so people can own a house after saving for a few years, rather than waiting until they've saved for a few decades.
It’s also a way to force saving, which is psychologically useful (and thus valuable).
General advice for homes leads to buying a home that does follow the logic, given historic movement of home prices and rental prices. It rarely is put in those terms, but works. For vehicles, the financial recommendation generally is to buy less car as it is a depreciating asset. If you have cash for a luxury expense, then it is no different from any other large luxury purchase, but if you have to finance, go as cheap as possible (but making sure to account for the repair costs, fuel usage, and such, not just the initial cost and loan payments).
Sure, without mortgage you may not be able to afford a house at all but it does not change the fact that mortgage is a "good" loan (i.e. you benefit from taking it)
- Why else would mortgage loans ave percentage rates if not to make money off lending you money?
In my experience, the average American has no concept of saving money, and those below average even less.
It's funny to me that America gets flak from all over the world for having no social safety net; if this was actually true, you'd expect to see people put aside a bit of their income, however meager it may be, out of an expectation that they will need it. What do you see in practice? You see people dashing over to the nearest rent-to-own rims shop. (If you don't know poor people, you may not know such businesses exist.)
> Almost none of these people have the kind of collateral needed to use credit to truly transform their lives, and the government assistance for that is seriously lacking in the US
I doubt that greater availability of credit, perhaps facilitated through government subsidy, is what precludes the majority of such people from transforming their lives.
For the risk to make sense you probably do already need enough, though.
Is your position that taking debt to buy a house is bad unless you can sell it for a profit? Is working for the mortgage lender to accomplish that not worth it?
You can avoid it by renting, but then you’re just working for the landlord, so there’s no avoiding it.
Buying a home from a landlord is still working for a landlord; you just pay the present value of future cash flow in a single lump sum, like an annuity.
It's not clear to me how they pick people to lend to.
If someone is offering you a 0% APR loan, it’s either because they’re hoping you’ll move your loans to them, and become unable to leave once the 0% period has ended. Or they’re trying to sell something else (either more of something, or the same thing at a higher price), and want use consumer debt to artificially increase market demand.
You upgrading a boat, so you can save money in the long term, is literally the opposite outcome they’re looking for here.
0% financing costs the retailer 8%(ish) of the total amount, which is how the lender makes their money.
So in your case, the retailer didn’t want to lose that much of their margin.
There's also a lot of reasons one might be rejected for a credit line that have nothing to do with credit score. Some lenders have specific policies in addition to credit score, like Chase's 5/24 rule. Some are also just looking for "relationships" and won't offer you their best products unless you have a bank account with them, etc.
The proletariat is too illiterate and short-term-focused to be trusted with it.
There are at least as many ways that this can be finished accurately (for some theory) as there are theories of what should guide human behavior, generally. But this one:
> to make more money.
Is really more apt to theories of appropriate behavior for arms-length business organizations whose only shared interest among their owners is profits than the common ones for individual people.
There are also all those reports that have come out about how nearly 40% of Americans don't have $400 for an emergency [1], with the median being just $600.
If the rule of thumb for an emergency fund is 3-6 months of expenses, and we can agree that paying interest on a credit card is a bad finical decision, then I'm not sure how the "average" person has solid fundamentals, where credit cards are being used as a strategic tool.
People also tend to spend more when using credit cards [2], which negates most benefits someone may get from using credit card for the points. So even those with solid fundamentals, who are using it as a tool, are probably still losing, just in a less obvious way.
[0] https://libertystreeteconomics.newyorkfed.org/2025/03/why-ar...
[1] https://www.empower.com/press-center/37-americans-cant-affor...
[2] https://link.springer.com/article/10.1023/A:1008196717017
Just to make the money you are making now, you need some stuff, be it a phone or a car, home AC, oven or even a washing machine at home (you can't go to work hungry in dirty clothes).
If you don't have the money to pay with cash, you'll be buying that oven/stove with whatever delayed/monthly payment option is available.
Yes, if you're buying franchises you can do the "make more money" calculations, but if your kids are going to be hungry soon, you often have no choice.
For example, if you make 5000 dollars a month and get a 5000 dollar BNPL loan for a stereo, payment due in a month, then even without interest, you now either starve or default on the loan (or incur penalties, i.e. the interest you thought didn't apply).
I’m pretty sure the median American does NOT carry a monthly CC balance. They pay it off in full every month.
But it’s very close to 50%. And may swing one side or the other depending on how fubar the economy is at that moment in time.
So what you said is true for roughly half of Americans. But not true at all for the other ~half.
I think.
I think the kicker is, the ~50% of people who don't pay them off in full every month can have a massive amount of CC debt and struggle to even make a dent in it.
As long as inflation is higher than the interest rate, it means having to work less than an hour in total.
(But it's unsustainable in the long run ...)
It'd be nice if kids were an affordable choice for anyone expect Elon Musk, but you know, here we are. \o/
Credit moves money across time. That’s it. (Analogous to paying a shipper to move stuff across space.)
Not all consumptive debt is bad.(And not all consumptive loans are wealth destroying. I opted to borrow when I bought my car because the rate was so much lower than what I figured I could earn with the money.) And not all cash-flow positive wealth is good.
We should be more scrutinising about how debt is used. But especially for folks with volatile incomes, accumulating debt for consumption is fine as long as it doesn’t snowball.
debt allows people smooth that out and lending companies take a fee for that service
nothing evil or wrong about it
Sample: https://www.wsj.com/articles/SB109469015834513166?gaa_at=eaf...
Consumer debt, obviously, almost never follows that logic.
Credit loans or payment plans can also be used to get a higher credit score, making the first item easier.
Conversely to your example of credit making cash, Cash can make you money through investing, so Credit can also be used to keep higher amounts of cash on hand when purchases are made. , e.g., buying a car on credit and using the car money to invest. But we're saying the same thing there.
Yeah, even at a basic level, it should be made clear that cars depreciate and real estate, by and large, appreciates in value.
One of those is "good money" and the other is "bad money". Kids should learn coming out of school to be able to distinguish which of the two they are throwing "good money" at.
This is prima fascia false. Credit, especially artificially low interest rate credit like this, can be used for a ton of reasons, including 'beating inflation.'
I bring this up because so many diligent savers in 2019/2020 got screwed by waiting to buy big tickets items.
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Used properly these provide liquidity by spacing out payments.
Certainly there are economic concerns about not being able to afford groceries today but liquidity (especially free liquidity) isn't fundamentally worthless.
That said, one of their practical advantages is that they’re harder to use improperly than credit cards.
If somebody can BNPL or otherwise credit lifesaving medicine (such as the many people in the USA who die from inability to afford healthcare), that's not play money because they don't want to work.
However, I stood in line behind someone who financed a bowl of noodles with afterpay, and it got me thinking. Those are the folks I'm talking about.
There is such a thing as opportunity cost. Putting dinner on a credit card is dumb. Putting a dinner on credit that ends up being a first date creating a memory and connection with your future spouse is life making. Or dinner with grandparents and kids that might not be around long.
You have completely ignored opportunity cost in your factoring. And it is probably the most important 'human' factor and is just as tied to your 'time' argument. We have 60 some rotations around a star, and stages in life during that time. That needs to go into your 'optimization' as well.
15 years later it takes 3 hours work to earn the same amount
If I borrow 100 units in my 20s at 4%, it cost 4 units per year
I save 20 hours work, and it costs me 4 units a year. That's 48 minutes work in year one, reducing to 8 minute after 15 years. Overall it costs an average 20 minutes a year for 15 years, or 5 hours of work, then I repay the capital which is 3 hours.
I've spent 8 hours of work rather than 20 hours.
I eat garbage by the standards of anyone who gives a crap about food and you don't see me going around looking down on everyone for wasting resources on fancy food ingredients and fancy cookware and whatnot. At the end of the day these unnecessary things bring enough perceived benefit to people's lives that they seem worth it, whether that's you overpriced LeDouchebag brand enameled dutch oven or a financing service for consumer garbage doesn't really matter. It's all a "needless" expenditure at the end of the day that people find worth it.
I've never used these services and probably never will, nor am I saying the prevalence of these things is optimal at scale, it's probably not, but I'm not gonna sit there and act like 1 in N consumers, probably hundreds of millions of people, is wrong or ignorant for using them or that I know better for not.
-shitposted from my 8yo phone while driving my $500 car through traffic on bald tires
[1] https://knowyourmeme.com/memes/am-i-so-out-of-touch
I mostly agree with you, but some of those "needless" expenditures have negative externalities when avoided. Whether that's processed foods causing heart disease and diabetes that strain public health resources, or your bald tires greatly increasing the likelihood of an automobile accident that could kill you or someone else. Your response takes an opposite extreme that none of this matters, when in fact much of it matters, but it's not like treating it like it matters makes you a better person. We need to eliminate moral value judgements from the equation, while still being reasonable.
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And yes, I'm aware cars are depreciating assets, so spare me the lecture on financing one. I don't currently have a car loan.
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Paying rent doesn't count towards your credit score (at least it didn't a decade ago when I was getting my mortgage). And it's a glaring signal of how the system isn't built for what it claims: evaluating your ability to pay obligations on time. No, the system is built to trap people in poverty and enrich the rentier class.
Framing the current default as a help to the rentier class is just silly.
The rentier class are indeed a major cause of stagnation and inequality in our economy, but they are innocent of this one.
https://www.experian.com/blogs/ask-experian/can-late-rent-pa...
This benefits the landlords for the reasons you outlined, and tenants must interact with the credit industry through additional (often predatory) means in order to build a credit history that may allow them to buy their own home. Further, landlords have an incentive against providing this positive feedback, as doing so makes it more likely that tenants would exit a relationship that is profitable to the landlord.
The reason buy now pay it later is being added, is because those lenders are having trouble collecting, so they want to add it to the credit score so there is an additional consequence if they don’t get paid. It’s a collection activity, not something that’s designed to help the payor.
Adding rent is mostly a benefit to the landlord not to the poor people.
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From my extremely naive understanding, obtaining credit and low rates is, in general, much easier in the US than other places. So it makes sense to me that it has “artificial” tools to help determine risk. How do other countries handle this and provide the availability that can be found in the US?
In my experience, rates are not low in the U.S. They are high because high risk loans are able to be granted.
The availability of debt for things like housing and cars is very complicated, but high taxes, a high degree of education, livable minimum wages, and realistic employee rights helps increase stability and decrease risk. I don't say it to be flippant. It is more complex than even I understand. It's only to say that, given that these systems are designed artificial systems, there are multiple implementations that work under various constraints and incentives.
In Scandinavian countries there are registries of your income (from the tax authority), your debts (including buy now pay later which are technically flexible loans) and any bad debts you have that have gone to debt collection. No history of previous balances, repayments, how long you've had a credit card, etc... Companies use this to come up with a score, either themselves or a company like Bisnode will do it for them. So basically it's a simpler calculation based mainly on current situation than history.
That being said, there's an innocent explanation for this specifically. BYPL is pretty new as a common type of debt (became popular in the last five years). They're putting it into FICO 10. The last time they updated FICO was FICO 9 which was released in 2014, before that there was FICO 8 in 2008... a lot of banks are still using FICO 8 or even earlier models. Banks are slow to change, and FICO moves slowly because banks don't want their models upended every year. Fwiw if the government was more involved in this I doubt it would be taken into account any faster.
The reason is that your credit score is impacted by both your available credit (higher is better) and credit utilization (lower is better). When you pay of the last of a home loan and close that account, your available credit goes down and your credit utilization goes up (assuming you had any other debt). Both of those hurt you. When you pay the credit card down to $0 and leave it open, your available crediot stays the same and your utilization goes down.
It can have a short term impact, sure, but long term (a few years), your score will be fine. I paid my last student loans years ago and I did see a sudden score drop and not I'm sitting right below 800 with no debt.
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I wonder if this is going to change.
Equally, I find it weird that companies can ding your credit for not paying but have no obligation to report on-time payments. It should be both or none.
Ironically, there is actually zero reward for being a reliable person, there is only a punishment for being an unreliable person; and with all the money printing, even the punishment for being an unreliable person has been almost totally removed and being reliable and upstanding is effectively a punishment since you don’t get to live like a king on a shoe string and then declare bankruptcy and have credit extended to you immediately afterwards because money is cheapened and consequences are void.
I don't lend to friends and family. It's not worth losing those bonds over. I'll help financially where I can, and I'm not going to stop anyone paying me back, but I'm assuming that money is just gone.
Completely different calculus compared to credit.
https://www.nytimes.com/2025/03/23/business/doordash-klarna-...
I can afford it but I don't use it because it's obscene.
I'm tempted to say that some people are poor because they're imbeciles with poor financial sense.
What does need to happen however is that these inputs are properly weighted such that those using FICO can make appropriate decisions. Similar to credit cards, numerous BNPL-purchases do not necessarily indicate that the debtor is in financial trouble. They could merely be using the services for the other conveniences they offer. Whereas seeking numerous loans is usually a negative metric.
FICO scoring is far from "transparent".
This thing where the score as in "risk" and score as in "business opportunity for lenders" is intertwined, and creates weird incentives for consumers, is that only a US thing or do any other countries have something similar?
The fact people always debate what a credit score really means suggests that there are too many factors rolled up into a single number when we should really have a few distinct sub-scales. Anybody that has made a dashboard for a ceo with a short attention span that refuses to deal with nuance and just wants to see “a number” knows this problem all too well
That means that barring any failures to service credit in the past, I don't need a history of successfully servicing credit in order to get credit.