Hacker News Reader

Comment by archildress | Hacker News Reader

Credit scores are so fundamentally broken anyway.

In financial analysis of a company, the number one item you tend to look at is "free cash flow" - the "cash available for the company to repay creditors or pay dividends and interest to investors." [1]

Why then do we not take income into account in credit worthiness? Why do I not periodically upload my W2 or tax return to the credit bureaus in order to show that yes, I'm credit-worthy because my income makes it possible to service my debt?

The entire idea of a credit score based on having had credit and paying past loans off is asinine. To start throwing nonsensical parameters like browsing history into the equation is second derivative asinine.

[1] https://www.investopedia.com/terms/f/freecashflow.asp

View on HN

> Why then do we not take income into account in credit worthiness?

We...do. Any significant credit application will look at your employment history, income, and credit score, not just the latter.

> Why do I not periodically upload my W2 or tax return to the credit bureaus in order to show that yes, I'm credit-worthy because my income makes it possible to service my debt?

Credit reporting companies do gather and provide pay data. As fir other data, they don't gather it directly from the people about whom they keep files.

> The entire idea of a credit score based on having had credit and paying past loans off is asinine

No, its not. While past performance isn't a guarantee of future results, it is useful as a guide. And it isn't the only factor considered in most loans.

In reply to your first point, the original article discusses credit score, which does not use income in any way. You're talking about applying for loans, which use a credit score and other factors to determine credit worthiness. My points are relevant to the credit score only.

Consider the fact that conflating credit score to credit worthiness (respectfully, as your reply does) as the biggest indicator of the brokenness.

The purpose of a credit score, is to show past payment history.

Current income, W2, working or not, all of this is a second factor, separately determined by the lender.

Web browsing habits are odd in either category.

> Consider the fact that conflating credit score to credit worthiness (respectfully, as your reply does)

No, it doesn't. My reply was to a question that did that, and explicitly corrected it, identifying other factors considered in creditworthiness besides credit score.

Again, my original comment is merely a criticism of credit score and not the entire consumer lending infrastructure. Three credit bureaus purport to have a comprehensive opinion of someone's credit worthiness without considering their income and that's broken, full-stop.

> Again, my original comment is merely a criticism of credit score and not the entire consumer lending infrastructure

Then why did it explicitly say that income was not considered in creditworthiness? The conflation of that with credit score was from this line in your comment: “Why then do we not take income into account in credit worthiness?” My response was directed at the error in the explicit premise of this question.

> Three credit bureaus purport to have a comprehensive opinion of someone's credit worthiness

No, they don't, which is why they also gather and provide, as separate products, payroll data and other data, and even credit decision platforms that incorporate income and other data. Credit score is a single product with a more limited function (both as advertised and as used by customers) than you are representing.

Exactly, a credit score is supposed to correlate with someone’s willingness to repay debts. Income is used to determine someone’s ability to repay. Almost all lending decisions evaluate both.

> As fir other data, they don't gather it directly from the people about whom they keep files.

Sounds unethical.

> Why then do we not take income into account in credit worthiness?

Income is definitely considered in large loans. You’re not going to get a mortgage or a car loan on your credit score alone.

Credit firms also collect a lot of payroll data, but it’s kept separate from what you know as your credit score because they inherently can’t have payroll data for everyone that also has credit history data. The scores must be kept separate as a result.

Here’s just one example of credit worthiness companies expanding their payroll data collection: https://krebsonsecurity.com/2021/07/intuit-to-share-payroll-...

>Why then do we not take income into account in credit worthiness? Why do I not periodically upload my W2 or tax return to the credit bureaus in order to show that yes, I'm credit-worthy because my income makes it possible to service my debt?

Is this supposed to be better? Right now I can apply and get credit cards without mailing my paystub. That actually seems better than companies having regular updates of my income, which they can use for evil marketing purposes.

Most credit cards adjust credit limits based on income levels

This is definitely true although 99% of the time they rely on self reported income. American Express is one exception that is known to occasionally “Financial Review” big spenders, asking the borrower to authorize release of their prior IRS tax transcripts.

https://krebsonsecurity.com/2017/11/how-to-opt-out-of-equifa...

Your pay history is probably sent out to all your creditors, unless you've opted out.

> To start throwing nonsensical parameters like browsing history into the equation is second derivative asinine.

And trivially exploitable...

> Credit scores are so fundamentally broken anyway.

The bigger problem is that the organizations designing credit scores (and alternative metrics) are incompetent.

Organizations are allowed to be incompetent. The real problem is they have buy in from other industries with major decision making abilities and the government has provided us no protections from them.

If Equifax went out of business today, you'd have 5 new equally shitty credit companies trying to get their market share.

> Organizations are allowed to be incompetent.

Only up to a point, though. Restaurants can be shut down when they have too many health violations. Private medical practices can be sued into the ground. There are lots of types of incompetence in finance that can get you shut down / sued out of existence.

> The real problem is they have buy in from other industries with major decision making abilities and the government has provided us no protections from them.

Which is why I'm being vocal, where possible, about how incompetent these organizations have become.

That is apples and oranges.

I’m not using an EBITDA/MV equation on my personal valuation, nor am I using FCF for any credit calculation.

Credit calculations are based on the most reliable data points that correlate with outcomes I care about.

Frankly, new tech is helping credit calculations - people are using phone call data to find what correlates with credit worthiness. I believe this is already in production around the world.

Whether the term “credit scores” is used or not, there will always be some mechanistic way to value risk. It will also use whatever data we have lying around to do so.

If we have no data, then it goes back to the good old days of the boys club, which is even more restricting Thant today.

I didn't bring EBITDA into the conversation; free cash flow is a useful metric for both personal finance and corporate finance and isn't comparable. EBITDA is too adjusted to be useful for personal financials.

Can you tell us who is giving out large loans without verifying income?

All major US credit card issuers. Many auto lenders. Most of consumer credit outside of mortgages operates without any real income verification.

Here, "large" runs at least up to $50k-$100k per lender without any meaningful income verification.

They usually ask you for your income in the credit card application. If you lie, you may be committing credit card fraud.

Hence, the key word "VERIFYING"

These issues are abstracted by the delinquency rate. Some X% will not pay on time.

By reducing the information taken, do we add sufficient additional users to overcome the X% loss expected.

It's a high trust process in a high trust society. Assuming that most people are honest, it works out well. Verification bogs down the process and may discourage people from applying. Clever fraudsters can probably pass that anyway.

A person may open a credit card at 18 and be given a limit of $2,000. That card may still be open 10 years later, when the issuing bank raises the limit to $20,000. Many banks do not even require attestation of income to raise limits like this. This is what I mean by no meaningful income verification.

Income verification is what happens when you buy a mortgage. It has nothing in common with the credit card process.

> If you lie, you may be committing credit card fraud.

It seems like we're heading for a society lying and fraud are engaged in and almost tolerated a lot more, and certainly where resources for enforcement are stripped.

If you work for a large company or a small company using most payroll processing services, your pay is probably easily retrievable by any creditor.

https://krebsonsecurity.com/2017/11/how-to-opt-out-of-equifa...

Even though the article is old, I saw my last few years' pay history in the links provided there.

Opting out feels like a devil's bargain: credit will presumably cost you more or be harder to get as a result. But there's no fine-grained way to choose who gets the info.

Self-employed for many years. Anecdote, but I can tell you that my access to consumer credit has not been impacted in any way by my compensation not appearing in those databases.

On larger loans, sure. But the credit score metric that is the first indicator does not inherently use income. You self report with no verification whatsoever.

I've never had my income verified for anything less than a car loan. Every revolving credit account has taken me at my word.

Every landlord I’ve had (except for a sketchy cash-only guy) has verified my income. They also verified for my first car loan (I guess due to lack of any existing loans.)

Income is required for any loan ranging from a personal loan, to a car note to a mortgage. Even renting an apartment requires proof of income! The only loan that doesn’t require proof are student loans, and those are essentially impossible to default on.

> The only loan that doesn’t require proof are student loans, and those are essentially impossible to default on.

They are trivial to default on. They are very hard to discharge.

Just to be clear, my criticism is of the credit score metric, which I feel is disproportionately depended upon for credit worthiness. A credit score does not take into account income.

The way I understand this system is that you have to buy your credit score. Borrow a little, pay interest, so that you can borrow a larger sum later.

You never need to pay interest. If you pay your statement balance by the due date you'll never pay interest but your statement will reflect a balance.

Credit cards make money on the transaction side, so they don't need you to pay interest to make money. Simply borrowing against your credit card (i.e. performing transactions) is sufficient to keep them happy, and they 'reward' you with a higher score as a result.

At the end of the day, a credit score indicates how profitable you will be as a customer for a lender. Showing profitability for a lender in a past indicates that you will likely be profitable in the future as well. Thus, in effect, you do have to buy your score, although the method of purchase may not always be straightforward.

I understand how credit cards work. I also get a lot more out of that transaction fee than just a credit score, so I am OK with it. But my point was just that you don't have to pay interest, it wasn't really about any of that.

Yeah this whole credit score conversation going on in this thread is very weird. Has nobody here bought a car or applied for a loan ever?

And how is Bitcoin going to tell whether you default on loans or not?

Practically speaking, transaction fees are interest, you just pay it in a roundabout way.

I hate to keep this thread going, but they are more interest on cash payments than anything (due to increased prices) but with the card I get most of that money back in rewards and security (can have transactions disputed on demand and have them instantly removed).

That was a fun tangent, for sure, but it remains that you are indeed paying interest, if not directly, in a roundabout way. Credit card companies would not provide you with those benefits if you did not provide them with revenue to justify the cost of the benefits plus some margin of profitability. Nothing in the world is free. At the end of the day, your credit score is bought, as the original topic of this thread asserted.

Is there any other country than the US that has a similar credit score system, based on repaying the most past debt possible?

Reply on news.ycombinator.com