this post was submitted on 15 Feb 2024
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Credit rating measures your profitability to the credit industry, if you pay off your loan early, they make in interest, thus less profit.
Not entirely true. I'm what they call a deadbeat (meaning I pay off my cards in full every month and have been doing so for the past 10 years, making them $0 profit), and I have a 800 score.
I think the more correct way to think about it is that it's an estimate of your profit potential. What everyone tells you to do with a score this high is to buy a house because you qualify for the best mortgage interest rates. But of course then they'll have me on the hook for the next 30 years, and they stand to make in excess of $100k in profit.
100K profit on a mortgage? that's insane
It's actually far worse than that. If you get $400k loan at the current rate and pay it off over 30 years, you'll end up paying over 1.5x times the principal in interest. Over the lifetime of the loan, a $500k home will cost you over $1M.
(from mortgagecalculator.org)
Wait why are the banks investing in home loans when instead investing that money into the stock market (should?) yield greater returns over the course of the loan period (even at a very conservative 5% yearly compounding interest, $400,000 turns into $1.7M over the course of 30 years)
Mortgages are fixed income. Stock market returns are variable and therefore riskier. One bad year can wipe out multiple years of gains. Meanwhile, the money you collect as interest has already been paid, and as you can see from the calculator, the interest is front loaded, meaning the majority of it is paid at the beginning of the loan. So even with the probability of a default wiping out the remainder that's owed, it's still a much safer investment.
Why aren't these practices considered criminal?
Because the people and organizations with the capital to loan out millions of dollars for house purchases are the ones who make the rules.
What is your proposed alternative system? All of this is just an interest rate applied to an outstanding balance. Many less people would own a house without such an option.
Yeah my parents are vehemently against borrowing money except for a mortgage. Otherwise, how will you save several hundred thousand dollars or more to buy a house in full? Most people can't do that, even over decades.
Mortgages are "secured debt", meaning that they are backed by a collateral (in this case, the house). If the person defaults, the bank can seize the house. The risk is lower, and thus even when the interest rate is lower, the bank is willing to take it.
jeez, my apartment is fixed at 1% for 10 years, my house for some reason I didn't think about fixing it for longer and it's 1% for only 5 years, but even now that mortgages are peaking in my country they don't go over 6%
Way more actually. Whatever the house costs you’ll pay 2x-3x in interest.
That would imply people who constantly carry credit card debt would have high credit ratings, which is false as far as I understand.
It’s not, really, although it’s a bit more nuanced than that.
Credit scores are now taking in more information than ever, so things like your debt repayments as a % of your income (affordability) are feeding in as well.
For the people carrying credit card debt, one CRA might give you a better score if you carry a balance >0 but <25% of your total credit limit, and another it could be 0 to 40% so you will see some score variability.
If your utilisation is higher your score may suffer. This is only one aspect, though. Repayments on other debt (mortgages, utilities, mobile phones) play a part, as do things like voter registration and the time you have kept open your accounts. TransUnion is now incorporating BNPL (like Klarna) data for some reporting, although not sure it feeds into the score view yet).
I would highly recommend using whatever free apps are available for each of the CRAs (TransUnion, Experian and Equifax are the three main providers) to monitor your score.
For TransUnion you should be able to use the Credit Karma app in both the US and UK, and in the UK you also have the ClearScore app for Equifax score.
Experian in the UK is on the process of removing 3rd party app access (would have been MoneySaving Expert app before, but that’s moving to TransUnion).
Voter registration?? So you get a higher score if you're a certain political party. Alrighty then.
I wish they were transparent about what exactly they use and how they use it, not what they're saying they "may" use.
Not sure which part of the world the above poster was referencing, but I wanted to highlight that in some countries (like the UK that is briefly mentioned) registering to vote doesn’t come with a political alignment, it’s merely registering to vote.
From what I recall that is definitely a factor in credit ratings here in the UK, and may well be in other countries as well.
No it’s nothing to do with political affiliation at all,
And someone has already replied about the UK which is largely where my experience lies in this area.
Voter registration (entry onto the electoral roll) is additional confirmation that the address you are using for other credit/loan information is accurate.
no it wouldn't, due to the higher risk of them not peying it back