9

I've heard it said from people who work in the industry that your credit rating isn't a measure of your ability to pay, but rather a measure of how profitable a customer you are. I've also heard people saying that you have to carry a balance, have a rotating pool of debt, or make a payment a little late on rare occasion "to keep up your score". If that's true, essentially that means your credit rating is an investment, something you have to spend money to maintain--and should be afforded the same consideration you give to any other investment; i.e. what's the ROI? Most of the other reasons given for maintaining a high credit score would just be fear tactics at best or scams at worst.

Is that true?

Additional info: I don't want this to come off as "anti-credit" and confuse my question. In my belief, credit is very useful. Properly handled, both sides benefit, just as two parties do in any good economic transaction.

I'm interested in the interpretation of the credit score as something that costs money to raise. Is that true? And if so, can we analyze its return on investment? If that ROI is bad, are people getting scammed when they intentionally carry balances on multiple cards (or whatever) in order to raise their credit ratings?

Hopefully that clears up what I'm asking.

  • 2
    That's kinda a leading question. – user296 Mar 1 '10 at 1:39
  • @fennec I don't know if what I've heard is true or if I'm drawing the right conclusion--that's why I ask! – Plynx Mar 1 '10 at 4:21
  • 1
    Much better question title now. – user296 Mar 2 '10 at 17:27
  • or make a payment a little late on rare occasion "to keep up your score" LOL no. – RonJohn Sep 18 at 14:36
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Well, it is a negative point of view, but nobody in the history of money has ever loaned money because they like you. I suppose you could paint it as an honest point of view.

All money lending is for profit. If you have a high score, you are very likely to repay your loan because you are lower risk. We always hear lower risk... but the risk is that they won't make money off of you.

I think that just like we buy previously owned vehicles cars instead of used cars, and we banks call them service fees instead of junk fees, our credit score discusses our credit worthiness instead of profitability

But none of that means you can't benefit from it. It isn't a fear tactic, it is a way to judge each other. You probably pay interest and fees to keep it high, but that is price of lending.

I think the questioner has a negative view of credit (which I suppose is fine and is their right, I will defend their right to an opinion) but the way we do and judge credit is neither evil or benevolent.

I could certainly agree that more transparency would be good, but only for honest folks. If the credit bureaus made it public how they judged us, there would be a new industry for people who want to game the system.

Update

Since it always will cost to use credit, and using credit is the only way to prove your a low credit risk, it will therefore always cost money to raise your credit score.

However the return on investment is exemplified in this question: a person with no credit was able to get a loan, but at serious out of pocket cost. Later, after establishing credit at a price of real money, he was able to secure a nearly identical loan for considerably less cost (in terms of interest paid) because he had proven himself worthy. When I say proven, I mean paid interest.

There is nothing wrong with questioning the system, change only occurs when people question the status quo. And for sure our current system is not perfect, but like many employed systems while it is terrible but there is nothing better.

  • I like this answer, it seems you really can calculate the ROI, and (for some people at least) it's positive. – Plynx Mar 2 '10 at 1:11
  • 3
    Interest isn't the only way people make money off of you, especially for the credit card industry. They get a few percent whenever you buy something. – user296 Mar 2 '10 at 17:48
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    @fennec - Totally true. That also is a way they can limit their risk to still make money. I would like to see how much money Visa makes off of fees vs interest. I bet it isn't as tilted toward interest as I assume. – MrChrister Mar 2 '10 at 19:25
  • This answer is totally wrong. – duffbeer703 Sep 17 '10 at 0:59
  • 1
    @duffbeer703 - totally correct. If I understand it correctly, Visa, the credit card merchant gateway, the merchants bank and the merchant all share in the payment pie. – MrChrister Sep 17 '10 at 2:13
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MrChrister's answer is just plain wrong.

Your history of carrying debt or paying interest has nothing to do with your credit score. The biggest factors are payment history, debt to available credit ratio and length of credit history.

If you have active credit accounts for 5 years, have 10-15k in limits on credit cards and put gas and groceries on a credit card that is paid in full each month, you'll have a top notch credit rating. There is no way to tell from a credit report whether you carry a balance for pay in full.

Anyone who gets into debt to improve a credit score is ignorant of the process. If you have bad credit, here's how you improve it:

  1. Pay your bills on time. Always.
  2. If you have no debt, get a personal loan for $250 from a credit union. Pay it on time for a year.
  3. Apply for a standard Mastercard/Visa from a local bank/credit union
  4. Pay your bills on time.
  5. Rinse, lather repeat
  • Who said you have to pay interest? I said using credit. I said "probably pay interest". Interest will happen if you don't pay, but it isn't a requirement. Have a Duff and relax. =). – MrChrister Sep 17 '10 at 2:06
  • It very much costs to use credit because somebody pays, and that cost is likely passed to the credit user in some form or fashion via higher prices. – MrChrister Sep 17 '10 at 2:07
  • Finally, do you think the personal loan you suggest has no interest charge to borrow? Your advice is great, and not paying interest charges is fantastic, but there is a cost to using credit, and using credit is the only way to develop a score. – MrChrister Sep 17 '10 at 2:09
  • Not trying to be hostile with my tone, just defending my answer. =) – MrChrister Sep 17 '10 at 2:14
  • Yeah, I would advocate credit cards as a good way to build credit. That way you can pay it off every month and build credit while avoiding interest. The HUGE caveat is that if you can't pay your entire credit card balance off consistently then you are better off canceling the account. – Stainsor Apr 14 '11 at 18:51

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