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Well, as i have already claimed, i have limited knowledge on finance, but i do try to learn more things. Now, it's the de facto thing that banks love to lend money.

As i see it, with a debit card, they are taken kinda out of the game. They are not lending money, it seems really bad for them. On the other hand, it's definitely good for individuals.

But, why do we really need a credit history to buy some of the more expensive stuff ? Well, i foresee people mentioning the argument of being a less risky buyer.

However, when i buy something, i don't see why the seller HAS to know that i'm good at paying loans back. To me, all this credit card system seems like an awfully nice way to make loads of money, backed by governments as well.

But, am i thinking it correctly ?

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  • When have you ever needed to provide credit history in order to buy something without taking out a loan? I've only needed it in a situation where I was borrowing money, or signing up for a service where they would be billing me (instead of my paying in advance). – Chuck van der Linden Jul 8 '11 at 15:12
  • In the U.S., to rent an apartment you need credit history :) – SpyrosP Jul 8 '11 at 16:16
  • The seller doesn't need to know that you're good at paying loans back, but the person lending you the money (the credit card company) sure would like to know. – user296 Jul 8 '11 at 16:17
  • @fennec, that is exactly the point. Needing a third party for even the simplest purchase. – SpyrosP Jul 8 '11 at 18:25
  • @SpyrosP - you don't need to use credit cards, noone is forcing you, you can always pay cash. – littleadv Jul 11 '11 at 1:47
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As i see it, with a debit card, they are taken kinda out of the game. They are not lending money, it seems really bad for them.

Not exactly. It is true that they're not lending money, but they charge a hefty commission from the retailers for each swipe which is pure profit with almost no risk. One of the proposals considered (or maybe approved already, don't know) in Congress is to cap that hefty commission, which will really make the debit cards merely a service for the checking account holder, rather than a profit maker for the bank.

On the other hand, it's definitely good for individuals.

I disagree with that. Debit cards are easier to use than checks, but they provide much less protection than credit cards. Here's what I had to say on this a while ago, and seems like the community agrees.

But, why do we really need a credit history to buy some of the more expensive stuff

Because the system is broken. It rewards people in debt by giving them more opportunities to get into even more debts, while people who owe nothing to noone cannot get a credit when they do need one. With the current system the potential creditor can only asses the risk of someone who has debt already, they have no way of assessing risks of someone with no debts.

To me, all this credit card system seems like an awfully nice way to make loads of money, backed by governments as well.

Well, credit cards have nothing to do with it. It's the credit scores system that is broken. If we replace the "card" with "score" in your question - then yes, you're thinking correctly. That of course is true for the US, in other countries I have no knowledge on how the creditors assess the risks.

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  • +1 Thank you for the interesting reply. I agree with credit card safety, for sure. I was mostly thinking on terms of pure money spending. That is, you know what you spend, it's like paying cash. – SpyrosP Jul 8 '11 at 8:06
  • I agree that the system is broken. But that is because we bailed out the banks who made bad loans. Had we let them fail, as should have happened, then there is incentive to avoid those risky loans. Instead we have said there is no downside to loaning people money who will never pay it back, because the government will just come pay it back for you. – user4127 Jul 8 '11 at 15:22
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    Nitpick. I wouldn't say that debit card swipes are "pure profit". There's a lot of investment into the card processing system (which was even riskier and an even bigger deal in the days before computers and the Internet really took off). Now, possibly an uncompetitive environment means that they are exploiting retailers in excess of a normal rate of return on that capital investment, but in the absence of expecting free payment processing, some portion of the fee reflects the real expenses of the transaction. – user296 Jul 8 '11 at 16:13
  • @Chad - I don't think the bailout has anything to do with it, the system was there for years, the current bailout was due to misuse of loans, not inability of creditors to assess risks. They were able to assess the risks, they just ignored them. – littleadv Jul 8 '11 at 19:29
  • @fennec - the real expenses of the transactions are less than $0.01 per swipe, the fees can be up to $.0.50. That's pure profit to me. – littleadv Jul 8 '11 at 19:30
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Credit cards are a golden goose for banks, as they get to issue high-interest loans and simultaneously generate alot of fee income. Debit cards aren't quite as good, but they still generate substantial fee income -- ~2% of every credit/non-PIN debit transaction goes to the bank and credit card network.

Credit histories exist because they are the most effective tool available to predict whether you will pay back your loans or not. You don't need a credit history to buy most things, you need a credit history to get a large loan.

Think of it from perspective of a lender:

  • Would you give loans to people whom you don't know anything about?
  • Or rent an apartment to someone who habitually pays bills 2 months late?
  • Or loan money to someone who hasn't paid a loan back in recent history?

Credit scoring is the bank's way screening out people who are expensive to do business with. It's objective, doesn't discriminate on the basis of race, sex or other factors, and you have recourse if the rating agencies have incorrect information.

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  • Indeed: credit scores are a mediocre tool, but they're better than everything else that exists. – user296 Jul 8 '11 at 16:16
  • That is exactly what i was thinking, thanx ;) – SpyrosP Jul 8 '11 at 16:17

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