[matthewmacleod]

You just put the money in an account, pay the capital off every month, lose a little bit of interest and in 2 years you have a shiny credit rating even though it means zilch.

I don’t really get that - doesn’t it mean that the person who took a loan is relatively responsible and was able to pay their loan back on time?

Any system can be gamed, but I don’t get the impression that credit agencies are attempting to eliminate all risk - after all, it’s obviously possible that someone who has had perfect credit for years might simply run away with your cash! But the system doesn’t have to be perfect, or detect all outliers, to have value.

It seems intuitively obvious that lending to someone who is frequently late with credit repayments is riskier than lending to one who isn’t, and this is the mechanism by which that information is shared.

[mattmanser]

For £100 you get a shiny credit rating for no risk. That'll get you a mortgage for £100,000s.

In the 60s/70s it was about knowing your bank manager, so he knew you'd be able to pay. I appreciate that it probably benefited a certain type of person, but the new system probably has the same prejudices built in. Now it's all about the ephemeral and easily game-able credit score. Until a few years ago you would get negatively scored for not having a landline.

These scores are utter bullshit, they're simply about if you haven't screwed up yet, they're not actual assessments of your ability to pay or the risk you've exposed yourself to.

Again, I worked in the mortgage industry before the Northern Rock collapse, brokers used to be able to go to those guys and openly fudge people's incomes by calling them self-employed, they had a good credit score so no-one blinked an eyelid, get 105% mortgage, and then lo-and-behold, the bank collapsed. Yes, part of it was that they lost their access to easy bank credit, but another part of it was they lent to hugely risky people.

As a slight-side, my bank was willing to lend me crazy credit card money a few years ago because for 10 years I never missed a payment. In reality in those ten years I went through a patch of being the most business-un-savvy freelancer ever, selling myself at a stupid rate and not putting enough aside to pay my tax bill, to the point where I had to get a loan from a parent to pay it. I was flat broke, almost bankrupt, and these people were willing to lend me almost 9 months of my income.

I was not a good risk.

But because I paid on time for X years before, I was to the credit agencies.

[redblacktree]

> I was not a good risk.

Banks are using actuarial science to make loans. You were (possibly) an outlier. That doesn't matter. All that matters is that their risk models work in aggregate. If they're right enough of the time, they profit. It doesn't have to be perfect.

[tripzilch]

They had to be bailed out, remember?

[pow_pp_-1_v]

> In the 60s/70s it was about knowing your bank manager, so he knew you'd be able to pay.

You do recognize how terribly inefficient that is, right? In this day and age its all about scale. Expecting a bank manger to have financial profile of all the clients using his firm is impractical.

For all it's faults, the credit reporting agencies are providing a service. It's not perfect and I think it's best they could do with the information available to them. I expect they will improve their score though once they start incorporating signals from social media and other sources.

[mattmanser]

In reality the new credit agency model's been tested once, and it failed.

[gaius]

You do recognize how terribly inefficient that is, right? In this day and age its all about scale.

Is it, tho'? It is well known that IT doesn't improve productivity[1]; all the benefits of automation get swallowed up in the extra people needed to support and maintain it. So we can assume that the ratio of bank employees to bank customers has remained constant over time. So actually there's no reason for bank's not to operate the old personal-relationship model; they would need to employ the same number of staff to do it, just locate them in branches rather than at head office.

[1] http://www.computerweekly.com/opinion/McKinsey-Why-IT-does-n...

[trentmb]

> I was not a good risk.

But you were- you had access to a parent with money to bail you out.

[freeflight]

> I don’t really get that - doesn’t it mean that the person who took a loan is relatively responsible and was able to pay their loan back on time?

That's probably the reason why it would increase one's credit rating in a positive way. I have no doubts about these systems being broken in such a way that they consider people who take on credit, paying it back in time, as more "credit-worthy" than people who never needed/wanted to take up a loan.

A bank obviously wouldn't want to miss out on the first group of people, why they couldn't care less about the second group of people from which they make no money in the form of interest.

It's also interesting how these kinds of rating systems seem to be "broken" all over the world. In Germany there is "Schufa", which is not a bank but basically a private company with a de-facto monopoly position in regards to credit ratings in Germany and they are quite infamous for mixing up people and thus giving them a negative rating, often without the people noticing until it's too late and their negative credit check denied them access to a rented flat/credit whatever, after which it's their responsibility to get in touch with Schufa to clear up their misidentification.

[germanier]

> In Germany there is "Schufa", which is not a bank but basically a private company with a de-facto monopoly position in regards to credit ratings in Germany

Just for anyone from Germany reading: There are multiple, less well known agencies that are used by banks and others as well. They are definitely worth keeping an eye on. I will only mention Creditreform Boniversum, Arvato Infoscore, and Bürgel.