I was a 21-year-old father with #2 on the way. My car needed costly repairs; I needed a reliable vehicle to get to work. My mother suggested I apply for a loan at the local bank in town.
Mrs. Z, a long-time family friend, was the head teller and smiled when I walked in. I explained the situation. She helped me fill out a loan application for her to take to the loan committee for approval, and call her in the morning.
I was worried, fretting about overweight bankers, with vests and pocket watches, debating whether they should lend a few hundred dollars to a 21-year-old for a car.
My credit history consisted of a few months of mortgage payments. Our tiny prefab home was $99 down, $102/month, half the income from my primary job. If there were credit scores, mine would have been bleak; I had little credit history.
Things were different. It took years before I understood what probably happened.
Mrs. Z was my mother’s best friend, they were each other’s maid of honor. If I could find my baptismal records, likely she was my godmother. I’d guess she went into the manager’s office, told him the situation, I was a good kid; she vouched for my credit. So much for the “loan committee.” Decades later I asked her about it. With a huge grin, she said she didn’t remember.
What’s A Credit Score?
For months a medical provider has incorrectly billed me. Each month I contact them, they acknowledge I am correct, they will fix it; yet next month I get another bill.
A recent email mentioned a change in my credit score. The medical provider probably reported I have a past due balance. Why should I care? The only credit we have is credit cards, we pay in full and enjoy nice rebates.
Investopedia tells us: (emphasis mine)
“The credit score model was created by the Fair Isaac Corp., now known as FICO….
The three major credit reporting agencies in the U.S. report, update, and store consumers’ credit histories. …. Five main factors are evaluated when calculating a credit score:
- Payment history
- Total amount owed
- Length of credit history
- Types of credit
- New credit
A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit. …. Lending institutions often charge interest on subprime mortgages at a rate higher than a conventional mortgage to compensate themselves for carrying more risk.
…. While every creditor defines its own ranges for credit scores, the average FICO Score range is often used.
Excellent: 800-850
Very Good: 740-799
Good: 670-739
Fair: 580-669
Poor: 300-579″
Business Insider published a chart showing mortgage rate averages by FICO score:
The Balance outlines just how much a credit score can “significantly affect” a borrower. Note the loan is for $200,000, the gap would be greater if the amount was larger.
Credit scores are tools for assigning interest rates for all borrowing. The lower the score, the higher default risk; therefore, the lender charges more interest to compensate.
What about the human factor?
I’m perplexed with this entire process. I don’t see anything about net worth; it appears savers are punished. What about my loan years ago, the bank bet on me, a hard-working kid who was working three jobs to support his family?
In my 30’s I built a relationship with a manager of my local bank. He knew me, my family, my history, and gave me a personal line of credit. A simple phone call made money readily available …. no questions asked.
Today online lenders check your credit score and you can get a loan almost instantly, with little human interaction.
I contacted Chuck Butler, a former banker, and asked for some input.
He said the banks he worked for looked at several factors:
- Can they repay the debt?
- What is the collateral?
- What is their future earning potential?
- What is their history?
Chuck triggered my interest in his article, “Come get your car loan, you won’t have to pay it back!” He discusses inflationary effects in relation to car loans. He shares some ZeroHedge information along with his conclusion:
- “‘Are We Headed For An ‘Auto Loan Crisis’ As Delinquencies Begin To Rise? – July 7
- A Flood Of Repossessed Vehicles Poised To Hit The Used-Car Market – July 25
- American Drivers Go Deeper Into Debt As Inflation Pushes Car Loans To Record Highs – Aug 29
- Credit Card Rates Just Hit A Record As The Average Car Loan Rises To Fresh All Time High – Oct 9
- New-Car Loan-Rates Set To Hit 14-Year High As Affordability Crisis Worsens – Nov 3
- Perfect Storm Arrives: ‘Massive Wave’ Of Car Repossessions And Loan Defaults To Trigger Auto Market Disaster, Cripple US Economy – Dec 18
| “Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.”
— Ludwig von Mises |
So while the big picture is clear – Americans are using ever more debt to fund record new car prices.
…. A soaring number of consumers are falling behind on their car payments – a trend which will only accelerate – in a sign of the soaring car prices and prolonged inflation are having on household budgets.
…. In recent months, the number of people behind on their car payments …. and for the lowest-income consumers, the rate of loan defaults is now exceeding where it was in 2019….
…. A newer report from Fitch has laid out an even more startling milestone: more Americans are falling behind on their car payments than during the financial crisis.
Chuck again… Yes, these defaults usually start with the small stuff, and then one day, Whack! One Big Boy defaults, and then the dominoes begin to fall… I’m just saying…”
Hang on a minute!
I asked Chuck, “When the music stops, who gets stuck with these bad loans?”
He said, “Generally the lenders package the loans and sell them, along with the default risk. The real big boys, the investment banks, sell the loans as income products, touting them as safe investments to yield starved customers, pension funds and 401k’s.”
In other words, the credit score has two purposes. First to enable lenders to charge more interest to consumers with questionable credit. While the lenders say higher rates are necessary; they really don’t care; they sell the loan/risk to others. I’ve noticed many lending institution advertising ways for consumers to boost their credit scores. Hmmm……
The overall credit scores helps investment banks peddle their products to investors, creating the illusion of safety from default. We learned in the mortgage crisis, the underwriters were in cahoots with the banks, often giving these investment packages ratings they did not deserve.
Half-jokingly, I asked Chuck what credit score he would give the US government. He answered the question seriously, referring back to his four points:
“Can they repay the debt? I don’t see how it is possible to pay off $32 trillion in debt, coupled with rising interest rates and over $100 trillion in unfunded promises.
What is the collateral? Their ability to tax. How much can the hard-working Americans bear? Over half the population is already on the government dole.
What is their future earning potential? Unless our economy miraculously grows, and congress curtails unnecessary spending, I don’t know. Interest on current debt is really going to cause problems down the road.
What is their history? Oh, they won’t default. This is what concerns me…. Historically they will try to inflate their way out of debt. Our currency will become worthless in the world market. Personally, I can’t see the government allowing interest rates to revert to honest, free market rates.
Our major creditors, Japan, Russia and China have stopped lending us money. I can’t understand why the media isn’t picking up on the Saudis no longer requiring petrodollars.
The Fed is trying to fool the world into thinking they are serious about taming inflation. Our creditors aren’t buying it, our credit score doesn’t equate with current interest rates; particularly when they look at the potential for higher inflation. To continue borrowing we will have to raise interest rates to make our debt more attractive.”
Tying it all together
I’ve said before, get out of debt; renting other people’s money is expensive. Investors are lenders, not borrowers. Credit scores of prepackaged loan investments should be looked at cautiously. If your advisor has put together a portfolio consisting of several of their fee-based funds holding loans, be very wary.
If Michael Burry of “The Big Short” looks under the hood(pun intended) of these car loans he’d likely find the packaged loans are a lot riskier than we think. Expect defaults to continue to rise on both corporate and personal debts. While I wouldn’t short them as Burry did, I don’t want to own them either.
I’m wary about owning any debt, particularly long term. Defaults are going to rise, and I’m not convinced that inflation is going to be under control any time soon.
Gold and tangible assets should take a higher priority over holding dollar denominated debt instruments. Don’t get caught like millions of investors did in 2008….
For more information, check out my website or follow me on FaceBook.
Until next time…
Dennis
“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken
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I am sure me credit score is garbage in that have not had a loan/credit card for decades,fine by me.
I actually had a card would melt it down soon getting more preps(have plenty of cash and preps)as how when it crashes will they get paid back/they won’t.
Fuck the banks/govt./stupid investors,they have stolen monies from us to bail out their pet companies/projects ect.,fuck em back a bit while you can.
Another Jew creation to enslave the masses.I see totally illiterate niggers getting loans for 40 k cars lol. In 6 months the cars are destroyed or the repo man comes to get them. They rent apartments never finish a lease. When they are evicted they destroy the property. What a way to run an airline lol.
Credit scoring was invented to help banks and other creditors, but part of that was to provide a quantifiable measure of creditworthiness -as a defense to claims of discrimination by groups like the now-defunct ACORN https://en.wikipedia.org/wiki/Association_of_Community_Organizations_for_Reform_Now
The funny thing is that after credit scoring became prevalent, racial minority groups started complaining that they had lower credit scores!
807 but it dropped to 799 after applying for a card with Discount Tires, six months no interest to pay off $800 tire purchase. I have the cash earning a tiny bit of interest while paying off the tires.
I’ve always met my debt obligations even when experiencing layoffs and while seeking another JOB doing things like paint people’s freaking houses. Painting always bored the hell out of me being a bit too tedious. Got to do what one has to do.
My friend paints houses. Makes 3k a week on average he’s the working owner. Booked up for months.
I can concur on that. Honest work and honest contractors can make a shit load of money.
Many decades ago my car was rear ended. It was deemed “totaled” and the insurance company paid off the loan balance. Later I wanted another loan only to discover that the credit report had the car listed as “repossessed.” I went around and around with the agency to get it corrected. They kept going back to the same source that gave the erroneous info. I even got the VP of the bank’s loan dept. to write a letter verifying that the loan was paid, to no avail. Eventually however the agency relented and accepted they made a mistake. It took nearly a year to get the problem fixed.
That needs to be a crime. Lawsuits are needed.
In Gold I Trust.
Sounds like something the Mafia (Khazarian) would set up. I guess we are lucky they don’t break legs if you miss a payment.
We are not in debt but who knows what is in my husbands 401k. I think the Mafia came up with that idea, too.
401k is likely as much a “Jew creation to enslave the masses” as credit.
It’s not a credit score, it’s your social credit score. They are training you to be a slave.
That’s coming around. As an older debt free type I’ve paid monetary debt. Going forward what “they” will find is I can be “socially” unacceptable. I have credit cards for convenience , can I spell that? We’ve been Numbers longer than some understand. Fight it, you are still a number. Read the Bible.
Easy answer to the articles title is…
Nothing more than an invitation to servitude.
Credit score = scam to make your payments higher (via higher interest rate). The end!
Hey, do you know the formula for credit scoring? No, you don’t. You never will. It’s a more tightly guarded secret that the Coca-Cola formula.
Sure, you know some of the things that go into it … paying on time, not exceeding limits, not having too much credit, or to little, blah blah blah. You got the ingredients, but not the formula. And each of the Big Three have their own secret formulas, that’s why you have 3 different scores … and sometimes the difference can be 100+ points apart!
The credit scoring monsters can fuck you sixty ways to Sunday, and they don’t have to tell you why! Fucken Loo bastards, every one of them.
Yeah it’s a screwed up system.
one of the worst aspects of credit scoring is that insurance companies & employers are allowed to use credit scores to make rates or decide employment status —
Insurance companies often say they use an “insurance score” in the underwriting of your risk and therefore your premium. One such company told me their insurance score was simple a credit score they purchased. So utterly scientific. Just like “bend over, you will like it”.
My ex was a credit wreck. Never paid bills on time, deeply in debt. I divorced her. Next thing I get is my car insurance goes up because I have bad credit. Seems car insurance decided if you don’t pay your bills you are also an accident risk. I wrote the three credit bureaus explaining I was divorced and had been for quite awhile. My score instantly went from under 600 to over 800. The biggest problem with your credit score is they don’t keep them up to date.
I have good credit, because I almost never use credit!
I have one credit card that provides most frequent updates of my “score”. What I’ve noticed is opposite of you in that the score will take a small dip for “reasons” like not buying on credit as much as someone thinks I should for one. Makes no sense when payments are on time and often beforehand and having never balked on paying anything back. All my life if I was a few dollars short asking a friend to “loan” me a few bucks I did not forget and always repaid the friend. I cannot say that about some folks I’ve loaned a few bucks and how easily they forget. Screw having to ask someone to repay the $10 I loaned them.