I'm not from the U.S but I know about the dreaded "credit score" that haunts Americans. I've seen a lot of documentaries and videos on YouTube with people that can't get a loan to buy a house because of bad decisions in the past that affected their credit score. But I've also seen a lot of documentaries and videos where people are in over their heads in debt, debt that they might never repay and it's just getting worse.

We have a similar score in my country used when one wants to take a loan but it works differently. For example:

  • if I have no credit score (i.e. I have never taken on any loans, I don't have credit cards, etc) then to a bank that's a good thing. I need to prove I can pay back the interest on the loans by providing income reports and that's that. I can take for example a mortgage loan just fine like this. But not in the U.S though. If you have no credit score then most likely you won't get a mortgage loan. If you've never had debt somehow it's bad in the U.S. I don't get this.
  • this score in my country is an indicator of how much I can borrow. The more loans I have, the fewer loans I can get. If all my loan repayments sum up to more than 40% of my income then no more loans for me. In the U.S. though, I see people making 20K an year but have credit card debt of 90K. How is this possible? How can you get more loans when the ones you already have are way over what you can ever pay back?
  • if you are bad at repaying your debts then you get a bad credit score and you can't get any more loans. From this regard the measurement in my country and the U.S. is similar. This is what I think a credit score should work.

That's a few details to understand where I'm coming from. So I guess, my question is. How can Americans can get into so much debt and why isn't the "credit score" putting a cap on it?

A "credit score" in my country limits the extra debt you can take if you are already in debt. In The U.S. though, it seems that the "credit score" allows you to get even more debt if you already have a lot of debt. Paying the minimum monthly payment on all your credit cards and rolling the interest payments into the future somehow seems "responsible" behavior but having no debt is seen as "suspicious" and people are afraid to give you loans because they don't know how you will behave. Somehow the dude that has more loans than what he makes an year can get more loans.

Can somehow add a layman explanation on how Americans can be so much in debt but have good "credit score" that allows them to borrow even more?

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    Who would you trust more, someone who has regularly been making their contractually obligated payments on time for years, or someone that you've never met who says "I'm good for it"? The amount of debt is irrelevant, the lender just wants assurance they'll get paid - they are perfectly happy to collect the minimum payment ad infinitum (otherwise, the minimum would be higher). Commented Aug 20, 2019 at 15:46
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    @NuclearWang That’s the OP’s point, though. One standard uses repayment history as an indicator of future ability to repay. The other looks at current capacity to repay as an indicator of future ability to repay. As heuristics, both have value.
    – Lawrence
    Commented Aug 20, 2019 at 16:43
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    @NuclearWang: Why would you trust someone who has been paying off a debt for years more than someone who's been able to avoid ever getting into debt in the first place?
    – Vikki
    Commented Aug 21, 2019 at 1:18
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    @CharlesDuffy that is a US specific thing as a large country with very lax person identification. In most European countries the state knows quite well, who you are and financial institutions do, too. To put it into perspective, 70% of identity theft crimes happen in the US... the next runner up is UK with whopping 8% and Canada with 4%. The countries with no national id service.
    – Gnudiff
    Commented Aug 21, 2019 at 10:18
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    @Sean I would trust someone who's been paying off a debt for years to continue to do the exact same they've been doing, which is giving me money at regular intervals. So long as you continue to pay, a lender would prefer you never pay off the debt - if you pay it off, they stop making money. Someone who's never gotten into debt may have done that because they have no ability to repay - they are a complete unknown. The lender just wants a check every month, and one of the best indicators of whether they'll get it is if borrower has a history of sending checks every month. Commented Aug 21, 2019 at 12:42

11 Answers 11


I think the heart of the matter is that you're misinterpreting both what comprises a credit score in the US, and how they are used. This is evident in your second to last paragraph:

A "credit score" in my country limits the extra debt you can take if you are already in debt. In The U.S. though, it seems that the "credit score" allows you to get even more debt if you already have a lot of debt. Paying the minimum monthly payment on all your credit cards and rolling the interest payments into the future somehow seems "responsible" behavior but having no debt is seen as "suspicious" and people are afraid to give you loans because they don't know how you will behave. Somehow the dude that has more loans than what he makes an year can get more loans.

Credit scores are meant to be predictors of risk in the sense of using past behavior to predict future behavior. The models are built on training data which helps determine what data points about past behaviors can help us predict future behaviors. There's plenty of info on the web if you're interested in knowing what specific factors are used.

Lending decisions aren't made purely on risk though. They're also made on cash flow. If you're trying to take out a new loan, a lender will check your credit score to help them decide how to price the loan, if you're approved (riskier people will get a higher interest rate). They'll look at other factors to determine if you can afford a loan, i.e. debt to income ratio.

The point is, the credit score alone is not the decision factor used by a lender. It's not intended to be a sole indicator of creditworthiness. People who rack up a lot of debt may still have "good" financial habits. They may always pay everything on time and may never cause a loss. They may have a great credit score. However, they may not be able to afford any more loans on their current income. Or, they may have a really high income and could easily make payments on a new loan. Their credit score isn't meant to tell you which situation they're in.

You didn't tell us where you're located or the inner workings of credit scores in your jurisdiction, but it sounds like your credit score is meant to indicate risk and affordability. That's a significant difference.

To get back to the statements you made at the beginning of your post,

I'm not form the U.S but I know about the dreaded "credit score" that haunts Americans. I've seen a lot of documentaries and videos on YouTube with people that can't get a loan to buy a house because of bad decisions in the past that affected their credit score. But I've also seen a lot of documentaries and videos where people are in over their heads in debt, debt that they might never repay and it's just getting worse.

It's probably not reasonable to evaluate the lending practices in any country based on (potentially sensationalized or inaccurate) videos on YouTube. You gave an example,

I see people making 20K an year but have credit card debt of 90K

It's likely that either that person's income or other factor has changed recently, or they were creative (dishonest) in their loan applications, or they had a co-signer you don't know about, or there was some other mitigating factor. Anecdotal stories of the system "failing" to cut someone off don't inherently condemn the system, and it's almost certainly true that any other lending system or credit scoring system (including the one local to you) also has stories of people getting upside down in debt.

After further reflection, I'm editing this answer to make another point clear. It seems that a large part of your theory is based on credit scores being a measure of how much debt someone is in. You seem to be implying that a high score is somehow correlated to having a lot of debt. That's not true. It is true that "history" is one factor in the scoring system (in terms of how many accounts you've had, of what types, for how long). Specific to this factor, having more credit accounts for a longer time can mean that your score is higher. However, history is not the most important factor, and "amount" of debt isn't (directly) a factor at all. It's possible to have a very high score with zero outstanding debt. It's also possible to have a very low score with years of high balance outstanding debt.

The bottom line is, the score predicts risk. Having a history of using credit gives scoring models data to base that prediction on. The most important factors are based on being able to show that the consumer will reliably pay debt (i.e. they have a history of making payments on time, they do not have charged off accounts, they do not have accounts in collections) regardless of the amount of debt they're in.

  • 8
    "It's possible to have a very high score with zero outstanding debt." I don't think this is correct. My score was great when I had more debt. Last time I got a loan, my checked score was lower than expected. When I asked the banker to help me figure out why, he pointed out my credit usage (multiple types of credit) had all been reported at zero every month. I was paying them "too often and too soon" and they kept being zero at time of reporting - I didn't even realize I was doing this until it was pointed out to me. Credit at 0% usage/100% availability made me, supposedly, risky.
    – Aaron
    Commented Aug 21, 2019 at 15:59
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    @Ella - they're not pointing it out probably because it has nothing to do with the OP's question?
    – davidbak
    Commented Aug 21, 2019 at 17:06
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    @davidbak "How can Americans can get into so much debt and why isn't the "credit score" putting a cap on it?" Dude he put it in bold, the question is about credit scores and also about the American financial system in general.
    – Ella
    Commented Aug 21, 2019 at 17:34
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    @Ella not sure why you're commenting on my answer - maybe you can write your own answer if you feel something is missing?
    – dwizum
    Commented Aug 21, 2019 at 17:35
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    @Aaaron I have zero debt (pay off my cards every Sunday night; no mortgage, no car loan) and have an Excellent credit score.
    – RonJohn
    Commented Aug 22, 2019 at 20:30

Can somehow add a layman explanation on how Americans can be so much in debt but have good "credit score" that allows them to borrow even more?

A credit score measures the risk of not making monthly payments.

That's all. Nothing more.

If a creditor thinks you're a larger risk, they'll likely just demand a higher interest rate, or some form of collateral on the loan. Assuming they're wiling to take on that risk.

  • 16
    And as long as people keep paying monthly payments, the banks are happy. Actually happier than if the customers had been able to pay more than the minimum required payment. If the customer is deep in debt and is only being able to pay the minimum payment, it's beneficial for the bank, as it can squeeze out money from the debtor basically forever, as the debt will not decrease.
    – vsz
    Commented Aug 21, 2019 at 6:07
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    Down-voted for lack of elaboration. These snarky answers shouldn't be the highest voted ones, IMO
    – Cloud
    Commented Aug 21, 2019 at 10:38
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    Disagree. I see nothing snarky about a correct answer that is completely clear without elaboration. Let’s stop chastising people who don’t waste words.
    – WGroleau
    Commented Aug 21, 2019 at 14:45
  • 2
    This is the common belief, but I don't think it is actually correct, there are a ton of factors involved. IIRC carrying a balance on your credit card sometimes helps your score more than paying it off every month. The credit score is there to help the lender determine if you are a good investment for them. It isn't 100% about good habits (like not going into debt).
    – Ella
    Commented Aug 21, 2019 at 17:02
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    I don't think this answer is snarky at all. Credit score doesn't measure the things the person asking the question seems to think it should measure.
    – quid
    Commented Aug 21, 2019 at 17:09

One aspect that may not be obvious from outside the US is the prevalence of medical debt. A quick Google shows that about 2/3rds of bankruptcies are due to medical issues. The easiest way to end up $100k in debt is to find out you have cancer. While putting people into crippling debt because of medical issues is messed up, denying life-saving care to people with low credit scores would be worse.

  • 43
    66.67% of bankruptcies were tied to medical issues but 46% of bankruptcies were tied to unaffordable mortgages and 44.5% were due to living beyond one's means. So that's three reasons encompassing 157.17% of bankruptcies. Medical bills are not the primary CAUSE of bankruptcy filings. 66.67% of filed petitions include a medical bill, because the petitions will include all bills. I'd imagine close to 100% of filings include a credit card bill, why doesn't the study claim 100% of bankruptcies are caused by credit card debt? And cancer costs about 10x your number.
    – quid
    Commented Aug 21, 2019 at 1:02
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    @quid What's even more interesting is that 67% of statistics are made up.
    – MonkeyZeus
    Commented Aug 21, 2019 at 12:27
  • 8
    @quid is correct - 2/3rds of bankruptcies may include medical debt, but that doesn't mean those debts caused the bankruptcy. The vast majority of bankruptcies include many types of debt. It's also worth noting that recent trends in credit score models (i.e the most current FICO version) give lower weight to medical debt, since it's considered less related to a person's actual habits (i.e. people don't deliberately choose to have medical debt in the same way they might choose to rack up credit card balances).
    – dwizum
    Commented Aug 21, 2019 at 13:01
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    Further, it's worth noting that the "researcher" who provided the information in that article is also the head of a lobby group that advocates for national healthcare reform, so it's not clear to me if it's without bias. If I look at the industry benchmark data I have available at my job for voluntarily provided reasons for bankruptcy, I see loss of income due to layoff, loss of income due to death, and divorce listed higher than unexpected medical debt.
    – dwizum
    Commented Aug 21, 2019 at 13:09
  • 1
    @MonkeyZeus I think it's only 54%
    – Menasheh
    Commented Aug 21, 2019 at 17:56
How can you get more loans when the ones you already have are way over what you can ever pay back?

Credit scores don't exist to help the consumer; the exist to help the lender. A person who will never pay back their loans can be a fantastic investment.

The poor debtor still has to eat, so they will get a job. The court system will then let you garnish their income until the loan is paid off (i.e., forever).

So why aren't people getting unpayable loans in your country? The safety valve in this system is that people with loans they can never repay could file for bankruptcy. People in your country probably can file for bankruptcy. But bankruptcy in the US is a long, difficult, and expensive process. Moreover, recent laws in the wake of the 2008 financial crisis have tended to make bankruptcy harder, not easier to get.

TL;DR: The equilibrium amount of debt isn't determined by credit scores; it's determined by regulation, particularly the availability of bankruptcy.

  • 7
    This. The lender wants you to go into as much debt as possible without defaulting. Commented Aug 21, 2019 at 8:25
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    The US's system is downright evil.
    – Pyritie
    Commented Aug 21, 2019 at 10:05
  • 5
    @Pyritie - If by evil you mean people are given the freedom to succeed to their wildest desires by having many options to improve their lives available to them OR to fail completely because of really bad decisions then OK. I don't need anyone making sure I don't do something they think is a bad idea even though I want to do it. If my decisions result in bad things for me then I accept the consequences. You seem to want to give others the power to tell you what you can and can't do regarding personal decisions about your life. To me, that system is evil.
    – Dunk
    Commented Aug 21, 2019 at 21:17
  • 8
    @Dunk: I don't want to speak for Pyritie, so maybe he'll chime in, but you're missing my point. The question is: under which circumstances can the legal system be used to force another person to pay you money they don't have, versus just writing off the (foolishly extended) debt. In the US system, the courts are used to punish the poor people who made desperate loans indefinitely. In other countries, the regulatory system ensures that lenders have to give out money wisely, or they'll never get it back. Commented Aug 22, 2019 at 6:14
  • 5
    @Dunk Freedom of choice is not the same thing as freedom to endlessly exploit the poor in a way that ensures they will be stuck there for life.
    – Pyritie
    Commented Aug 22, 2019 at 9:46

In the U.S. though, I see people making 20K an year but have credit card debt of 90K. How is this possible?

You don't see that. I don't know what sort of fear-mongering sympathy extracting nonsense you've seen on the internet, it is not common at all for someone earning $20k to have $90k of credit card debt. In fact, at $20k of income a normal limit would a few thousand. That person lost their job or most of the debt is student loan related (because underwriting for student debt throws away the obvious income driven risk assumptions thanks to government support).

Credit score measures your history of repaying your obligations, that's it. Your credit score doesn't know your income. There are lots of people who seek, needlessly, to optimize their credit score by having the "right" blend of debt and the "right" utilization. But all a credit report lists is your:

  • reported debts (some debts aren't reported, interpersonal promissory notes being the most obvious example)
  • the original balance (in the case of installment loans)
  • the high balance (in the case of revolving debt)
  • the current balance
  • a minimum payment due
  • whether or not the account is in good standing
  • history of payment

It doesn't know your income history, level of education, whether or not your under/over paid, etc. If you want a car loan, the lender is going to request your employment information and some proof of income. That lender's underwriters will determine whether or not it's reasonable to assume you'll properly service the debt. Your score will be used primarily to set an interest rate, but your proof of income will be used to assess whether or not to issue the loan at all.

Paying the minimum monthly payment on all your credit cards and rolling the interest payments into the future somehow seems "responsible" behavior

The minimum payment on a credit card in the US will include the interest due. A normal minimum payment is interest plus 1% of principal.

The debt systems in many countries differ in a lot of very interesting ways, a lot of times, these differences are really in the details. To some extent these differences are cultural. There are pros and cons to everything.

In general I'll agree with you that a lot of people have bitten off more than they can chew and in some cases it's not clear who's really at fault. The whole point of debt is that you commit future earnings/productivity for liquidity now. Zero people should be buying a TV on a credit card that's not being paid in full. That TV, that dinner, those shoes, won't get more valuable as time goes on. It's one thing to use debt to buy a more expensive more reliable car than you could with cash because the car will facilitate your productivity. It's one thing for a company to borrow money to expand rather than waiting to fill the war-chest because it can be important to beat competitors to market, so giving up some of the future profit is worth it. But, I've heard the craziest rationalizations for consumer debt spending.

I think getting in to debt problems when you're young is far too common in the US. A $1,000 debt at 20% interest is $16.67 per month of interest. When I was working my very first job $16 was the better part of 2 hours of work, before taxes. $1,000 feels small. The "problem" is not the ones you illustrate. The problem is young and poor people committing 2 hours of work every month to service the interest on the TV, night out at the club, wheels for their car, they bought on their credit card. Young people get crushed by somewhat inadvertently committing relatively huge amounts of their productivity to service interest for innocuous consumer goods. In these situations it's not really clear who's at fault. Kids just don't understand that $1,000 is actually a difficult hole to fill at $8/hour.

But there's another group of young people today are giving postmates their credit card to spend $9 in taxes and service fees and $5 tipping the driver for a $12 sandwich so they "can work an extra 30 mins" because it's "less expensive when you consider my time." It's these folks that will also complain about their student loans while they lease a $6,000/year car. Then lose their $120k/year job for whatever reason when they have $90k of debt (comprised of watches, jewelry, clothes and vacations) and become the example you heard about. My grandparents, who lived through the depression, would have bought the ingredients for the sandwich from the grocery for less than these folks tip the delivery driver and spent a couple minutes preparing lunch for themselves, then saved the rest. There's been a culture shift.

Banks use statistics to underwrite large pools of people. None of the examples above is a "problem" for the bank. The bank knows X% of people will never pay the money back, it's built in. The issue is the stories are sad for the individuals who populate the X% of people who default. There are the genuine people who are hit with some unfortunate circumstance beyond their control and it crushes their finances. For every one of those stories there are 100 of someone who just made a long series of bad spending decisions until the situation became unsustainable then some catalyst event, like a job loss, causes the financial house of cards to collapse. But rest assured, for almost everyone with debt problems, their problem was not that they lost their job, their problem was spending and not saving. And spending habits are not included in credit score.

  • 15
    The second to last paragraph seems completely irrelevant except for the part about them having a 120k a year job and then losing it. Mostly just seems like a rant. The numbers are pretty bogus, AND if they're really making 120k a year, they're probably making ~$60 an hour, so spending $17 and getting paid $30 is still advantageous over spending $3 and not working half an hour
    – Mars
    Commented Aug 21, 2019 at 0:40
  • 3
    The point is that there is an overwhelming amount of money being spend on luxuries. On my postmates right now, a $12.20 sandwich has $6.15 of fees, for a total of $18.35 plus tip. So my numbers are a little off but my point stands. The problem is not debt, it's insane comfort/luxury spending using stupid rationalizations; it's not advantageous because the 30 mins is just taken from time at the end of the day that you aren't being paid for. Thanks for the style notes, I disagree with you and won't be editing anything.
    – quid
    Commented Aug 21, 2019 at 0:48
  • 2
    What kind of post does a postmate share with you? Is that someone you hot-desk with? Commented Aug 21, 2019 at 13:43
  • 5
    I had to look up what Postmates was -- apparently it's a courier/delivery service here in the U.S. Probably should have been capitalized in the answer. en.wikipedia.org/wiki/Postmates Commented Aug 21, 2019 at 15:49
  • 3
    @quid just to note: your current answer in no ways ties luxury spending to debt as structured. Presumably, the $60/hr job doesn't result in $90k debt over a $18 lunch or even a $6,000/yr car. Those by themselves aren't issues on a $120k/yr salary, so it seems irrelevant. If we look at a $40k/yr salary, we divide the sandwich price in 1/3 and end up at a $6 lunch... but the real question becomes what are the comparable hard living expenses? If both people are paying even somewhat similar housing prices, for example, the $6 lunch on $40k/yr is hugely problematic: THIS is how debt spirals
    – taswyn
    Commented Aug 21, 2019 at 21:02

One part of the reason is that bad credit scores do not stop people from getting loans, it just means that they'll pay higher interest rates. At the lower end, they may resort to predatory lenders. From the point of view of such a lender, having the loan repaid is almost the last thing they want. They'd much prefer you to just keep paying the (very high) interest on the loan forever.

OTOH, those of us with really good credit scores tend not to borrow, except for a mortgage or similar.

  • 1
    And of course what you describe is a vicious circle, people have poor credit, pay more interest, have less to spend, need to lend more, etc, etc, etc.
    – JAD
    Commented Aug 21, 2019 at 7:06
  • Confused by the final paragraph. I thought people who not borrow got poor credit scores, because their ability to repay is unknown.
    – gerrit
    Commented Aug 21, 2019 at 7:56
  • 4
    @gerrit - I pay for everything I can with my credit card and pay off the full amount every month. This (in the UK) will get you a good credit score but I wouldn't call it borrowing, although strictly it is, because it's not as if I'm taking out a loan.
    – spodger
    Commented Aug 21, 2019 at 9:19
  • 2
    @gerrit: That depends on what you mean by borrow. You can, for instance, have credit cards, charge most things on them, and pay the balance in full every month. I think things like paying utility bills and such factor into credit scoring algorithms, too. But as an example, other than a mortgage and a long paid off student loan, the only consumer loan I ever had (for a work truck) was paid off sometime in the early '80s, yet my credit score is well above 800.
    – jamesqf
    Commented Aug 21, 2019 at 17:33

Shouldn't the “credit score” prevent Americans from going deeper and deeper into personal debt?

The credit score is often used as a indicator of financial risk as @RonJohn stated.

Here is where it gets perverted in US Financial... Banks know low income folks and others with low credit scores are riskier, so they still make the loans but at a higher rate. They make lots of money on the high interest loans. When the loan goes bad they sell the debt to a collector and still make money.

US Banks recognize how lucrative a market it is to lend to low income/high risk customers. In fact some banks, like Capitol One and Bank of America, specifically targeted low income/high risk folks because it reaps so much profit even with the loans going bad.

I believe Bank of America boasted 30% of their profits came from the lowest 20%-income folks (the poor people, not the rich people). I don't know if that continues as of 2019.

In the US this is one of the practices known as a "ghetto tax". US law does not forbid the predatory behavior.

(I've got a PBS documentary on DVD that discussed this. I'll try to find it for a proper reference).

  • 2
    Correct. In one of Elizabeth Warren's talks, she relates how when she was giving a talk at a bank about credit card debt, she was told by one of the higher ups that the bank makes most of its money on the people who default. Particularly all the fines and fees get them. It's like any debt trap. It's a way of cleaning people out. The IMF does the same on the country level.
    – Diagon
    Commented Aug 21, 2019 at 11:54
  • And debt collectors make a lot of money in illegal ways because people don’t know the law and people who cave when threatened about a “debt” that doesn’t even exist.
    – WGroleau
    Commented Aug 21, 2019 at 14:57

I have moved recently to the US from Europe. The simplest answer I can think of is the ability of the Credit companies to trap you further by giving loans at "higher interest" rate.

For example, it is common to see Ads like "Have bad credit score? Don't worry! we have loan for you". Apparently such a loan is given at a significantly higher interest rate trapping the people further with a further bad score. This goes like a infinite loop.

In Europe, credit companies do not venture high risk/high interest lending at all, possibly due to regulations from the governments too.

  • 2
    So you consider providing someone access to cash for which they might have an very important need is 'trapping' that person and things would be better if that person had no access to cash. I guess that person will have to turn down that job because they don't have a car to get to work or clothes to wear and with loans being unavailable because do-gooders passed a law preventing lenders from 'trapping' borrowers. It is only an infinite loop for those who can't or choose not to learn from their previous mistakes.
    – Dunk
    Commented Aug 21, 2019 at 21:28
  • 2
    @Dunk No one should ever borrow from predatory lenders. Even if you don't have family to help, there are charities to help you restructure with better dept options. Commented Aug 21, 2019 at 23:19
  • 2
    @Dunk: Sometimes the cash is for actual needs, and can reasonably be paid back. More often the loan is for wants: not the inexpensive used transportation car needed to get to work, but the new oversized 4WD pickup used for the same purpose. (Which now can be bought with loans that run for 6 or 7 years.) Or even just for a set of fancy wheels to go on that truck, ,which can easily run to several thousand dollars.
    – jamesqf
    Commented Aug 22, 2019 at 3:28
  • 1
    @curiousdannii - What is your definition of predatory lender? Before the housing bust; banks were making ARM loans to people (actually they were being forced to make those loans by the government) at more than reasonable rates and those people knew full well that in 5 or 7 years those rates would go up. Those people benefited greatly from those low rates. However, many of those people failed to plan for what happens when the rates go up. Instead of blaming those people, the banks were blamed for predatory lending. WHAAAAT????
    – Dunk
    Commented Aug 22, 2019 at 20:13
  • 1
    @jamesqf - Why do you assume that you know what people 'need' better than each person determines on their own?
    – Dunk
    Commented Aug 22, 2019 at 20:17

I would like to add a few contributions on my experience in European contries.

First, in the majority of EU countries there is a so called usury tax rate, which is a limit on the effective APR (% of interest plus fees computed as if they were interests) above which the lender cannot issue a loan. This is regulatory and prevents interests from growing indefinitely. So lenders will try to charge customers up to that rate, and that includes in particular revolving credit cards.

Second, there are procedures and more likely chances to go bankrupt for the private consumers (according to each country's regulation). A consumer defaulting can be erased both debt and credit score, and while they won't probably get any more loans forever, the lender will suffer a huge loss. So lenders won't take the risk of lending too much money if the interest rate is not sufficient to be profitable and the customer is requested excessive payments.

There is also a third factor I have seen but can't really explain in this context. In Europe, it is more common for people in difficulty to settle an agreement to repay all the debt one shot at a significant discount rate, provided that the consumer proves their objective difficulty (lack of job, last property to sell...). A settlement agreement means just that the lender can choose between 1) continue stalking a problematic payer for life or 2) get X% (where X can be 70, 50, 30...) of the entire debt tomorrow and say bye forever to the customer. In this scope, it looks like a number of lenders prefer the egg to the chicken.


The mistake you are making is thinking that "having debt" means having a good score when, in fact, the opposite is the truth. The credit score that most lenders in the US use is your FICO score (developed by the Fair Isaac Corporation). In this credit score calculation 35% is made up of payment history and 30% is made up of credit utilization. When it comes to credit utilization, the lower the better. Having below 30% utilization is good but even lower is ideal. So in other words, if all my credit cards have a combined limit of $20k, then I should have balances of no more than $6k. So really if you're applying for a Mortgage you must prove you have enough income to pay it back AND that you have demonstrated responsible credit usage. The bank avoids risk because they do not assume that just because someone has the money to make the payments that this means they will consistently and reliably make the payments.

As far as how people with low income can have such huge balances and high debt... That is a tougher question. The US has pretty strict laws regarding how much a lender can approve for a Mortgage (many enacted after the mortgage crisis) perhaps there should be similar rules for credit cards? Make no mistake though, regardless of what you may have heard, if an individual has high balances on their cards or they're maxed out, then they most likely DO NOT have a good credit score.

  • In the US, credit card companies will actually give you money to sign up for their cards. E.g. the other day I got an offer that if I signed up for a PenFed Credit Union card, I'd get a $100 statement credit if I spent $1500 in the first 90 days.
    – jamesqf
    Commented Aug 22, 2019 at 16:07
  • @jamesqf: That behavior isn't unique to the US, or even to banks. It's extremely common for businesses to give out free or stupidly cheap stuff, in the hope of gaining some long-term customers. Commented Aug 22, 2019 at 19:21
  • Do you mean 30% of the credit score weighting factors are about debt to credit limit ratio, or do you mean the credit scoring system rewards a 30% debt to credit limit ratio? You use these ideas very close together and they are quite different. Commented Aug 23, 2019 at 20:33

I won't delve into the technical answers to your question, as they're a beaten dead horse. I'll give a more philosophical aspect.

A lot of it boils down to worldview.

In your country, it appears that there are safeguards in place to keep you from going into debt. America is more sink or swim. Those ubiquitous "freedoms" you hear us bragging about allow us to do many things; but they're also a double-edged sword.

The US credit score is a suggestion- not a restraint. As long as Company A is willing to lend you the money, your score could be 0...it matters not. America is the land of dreams. Everybody wants a house, car, beautiful spouse, and their friends' attentions. The freedom of credit means they can suffer the consequences later, but scratch the itch today. It's been that way for 70+ years. I have personal opinions on that, but this isn't the vessel for such conjectures.

Additionally, the total amount of debt is not always correlated with your income. Case in point, a famous football player retires- but has a materialistic wife, three kids in private school, and a freeloading brother. His previously high income will allow for an astronomical debt limit. So even if he makes $30k a year working for Wiener World now, he can still plow further into the red than if he never was rich.

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