#1 Edited by Zevvion (1830 posts) -

In last week's podcast (I believe?) the crew talked about you needing to build up credit to be able to buy things like a house. I'm not from the US, we do not have a system like that. How does it work? You need to use credit cards and the more you use them (and pay off your credit card bills) the better credit you get? And credit is needed for a house... why exactly?

Curious.

#2 Posted by csl316 (8172 posts) -

Your credit history shows how you manage your debt. If you pay on time and keep your balances manageable, you're seen as less of a risk.

A low credit score may make you seem like a bigger risk, so it may be harder to get a loan if they aren't confident you can pay it.

#3 Edited by Buneroid (428 posts) -

Yes the more things you buy and pay off with your credit card the better credit score you will have. It's the same here in Canada. It's kind of weird that by using a credit card you're seen as a less risky persona but whatever.

Oh I forgot. When you need a loan for a house the better credit score you have the better chance you will have to get it from whatever bank I think? I don't know how all that stuff works yet because I have no experience.

#4 Posted by TheHBK (5466 posts) -

Credit can be thought of two things. Credit itself is your ability to borrow. How trustworthy are you to pay back a loan and what are you able to reliably pay back given your current and history of income.

To build up credit, you get loans and credit cards which are open loans really. Credit score goes into your history and current credit. What cards you have and how much credit you have used as compared to what you can use. So the less you have on the card but the higher the spending limit, the better off you are. To buy stuff like a house or car, you need good credit because you buy those on loans unless you got that much cash on hand. So those are pretty much the largest loans most people will ever get. So good credit is necessary because it tells the lender how good you are at paying your previous loans.

#5 Edited by Video_Game_King (36090 posts) -

You're assuming it does.

#6 Edited by jgf (383 posts) -

Maybe a stupid question: How do you not pay your credit card bill? My credit card (Mastercard) automatically withdraws the amount I spent from my bank account. So I have no means to actually not pay my credit card bill. So in the US do you have to actively pay your credit card bill every month or something like that?

#7 Edited by ModernAlkemie (358 posts) -

They are mostly talking about credit ratings, which in the US are managed by credit rating services. These ratings generally tell a company how likely they are to make money off of you.

A high credit rating doesn't necessarily mean you keep yourself debt free. One of the best examples of this is that many credit card companies will give you a hit on your credit score both if you don't pay off the interest on your credit card debt and if you pay off all your interest. To get a high credit rating, you should maintain a constant, small credit debt while making timely payments. From the credit card companies' perspective this marks you as a good source of consistent revenue without being a large risk that will overdraw on their line of credit.

Good credit ratings are required for virtually any loan including mortgages and car loans. Also car rental requires a credit rating check. Another fun part is that when a third party checks your credit score it can negatively affect your score. A lot of groups are trying to push for clearer credit reporting from US financial institutions, but this has met with a lot of resistance from those institutions.

#8 Posted by Zevvion (1830 posts) -

@thehbk said:

Credit can be thought of two things. Credit itself is your ability to borrow. How trustworthy are you to pay back a loan and what are you able to reliably pay back given your current and history of income.

To build up credit, you get loans and credit cards which are open loans really. Credit score goes into your history and current credit. What cards you have and how much credit you have used as compared to what you can use. So the less you have on the card but the higher the spending limit, the better off you are. To buy stuff like a house or car, you need good credit because you buy those on loans unless you got that much cash on hand. So those are pretty much the largest loans most people will ever get. So good credit is necessary because it tells the lender how good you are at paying your previous loans.

Where I'm from they check your current job and what your salary is. They also check the contract (seeing how long you will be employed for) and they check any debt you might have. Then they decide with you how you're going to handle monthly payments. So, basically, the more money you make each month and having never had any debt is seen as less of a risk here. Interesting how those things are different. I guess I can see the logic behind either one, although the credit thing sounds kind of scary if you don't know it works like that. You may have been extremely responsible with money but still unable to buy a house.

#9 Posted by TheHBK (5466 posts) -

@zevvion said:

@thehbk said:

Credit can be thought of two things. Credit itself is your ability to borrow. How trustworthy are you to pay back a loan and what are you able to reliably pay back given your current and history of income.

To build up credit, you get loans and credit cards which are open loans really. Credit score goes into your history and current credit. What cards you have and how much credit you have used as compared to what you can use. So the less you have on the card but the higher the spending limit, the better off you are. To buy stuff like a house or car, you need good credit because you buy those on loans unless you got that much cash on hand. So those are pretty much the largest loans most people will ever get. So good credit is necessary because it tells the lender how good you are at paying your previous loans.

Where I'm from they check your current job and what your salary is. They also check the contract (seeing how long you will be employed for) and they check any debt you might have. Then they decide with you how you're going to handle monthly payments. So, basically, the more money you make each month and having never had any debt is seen as less of a risk here. Interesting how those things are different. I guess I can see the logic behind either one, although the credit thing sounds kind of scary if you don't know it works like that. You may have been extremely responsible with money but still unable to buy a house.

Well they do do that here, check your income and how long you have been employed at your current job. Just your credit history, your credit score determine what kind of interest rate you get and that then factors into how high your payments would be and if you can pay them. Yeah. I had to explain it to my brother that he had to take out a credit card, because as they explain in the bombcast, you might make a lot of money and have had a good job for years but if you don't have a solid credit history either, you get screwed when the time comes to take out these big loans. It really is counter intuitive that you can live without taking on debt but then you can't buy big things.

#10 Posted by jgf (383 posts) -

They are mostly talking about credit ratings, which in the US are managed by credit rating services. These ratings generally tell a company how likely they are to make money off of you.

A high credit rating doesn't necessarily mean you keep yourself debt free. One of the best examples of this is that many credit card companies will give you a hit on your credit score both if you don't pay off the interest on your credit card debt and if you pay off all your interest. To get a high credit rating, you should maintain a constant, small credit debt while making timely payments. From the credit card companies' perspective this marks you as a good source of consistent revenue without being a large risk that will overdraw on their line of credit.

Good credit ratings are required for virtually any loan including mortgages and car loans. Also car rental requires a credit rating check. Another fun part is that when a third party checks your credit score it can negatively affect your score. A lot of groups are trying to push for clearer credit reporting from US financial institutions, but this has met with a lot of resistance from those institutions.

A I see I mixed up credit cards with normal credit. So basically you have to constantly feed the financial institution of your choice by paying of small debts (with interest rates I assume) you don't really need. When you did that long enough they will grant you a larger credit that you'll actually need - for a house or the like.

Thats quite the opposite here in germany. I got basically taught to never use credit besides for buying a house or financing a business. E.g. if I can't buy a car in cash, I won't buy it or I'll look for a cheaper one. Its kind of funny that this attitude would proove quite harmful in the US.

#11 Edited by isomeri (1226 posts) -

The US system is pretty screwed up. It's basically designed by the credit card companies to make people use their cards more and more. I've never had a credit card and only miss having one when I'm reserving rooms abroad.

#12 Posted by Hunter5024 (5555 posts) -

I mean I guess you don't need good credit to buy a house if you just have several hundred thousand dollars lying around.

#13 Posted by HistoryInRust (6275 posts) -
How does credit work in the U.S.?

It doesn't.

#14 Posted by CrimsonAvenger (263 posts) -

I'm an American and I don't understand it. What happens if you don't have credit? I only have a Debit Card.

#15 Edited by laserguy (439 posts) -

Its simple, when I need more money for the slot machines and poker tables, I go to a loan shark, this loan shark doesnt look at my credit score like a bank would. He politely ask's me "How much you need?" I say. "I could use 20,000 please, just to get by. If I can just win a game ill be fine." "Sure, Tommy get the man his money." "Thank you ill get it back to you by the end of the week." I say. He seems very nice. He's a people person, he wants your business. "Now listen." He says as he puts his hand on my shoulder. "I know you got kids and a wife you love, so im pretty sure i can trust you to re-pay this loan, I mean i dont want to see the car go off a cliff with them in it, or somethig awful, right Tommy? Im gonna give this to you with the understanding that you re-pay me on Saturday, and the vig is three points." Now your thinking three points? thats a lot. But just think, if you went to a bank you might not get that loan and its probably going to be higher than three points.

That is American credit.

#16 Edited by EXTomar (4519 posts) -

A mysterious and proprietary formula is used based on a number of factors by companies to give a "credit score". It is supposed to be an indicator of "credit worthiness" but it turns out that it is about as accurate as Metacritic is for pointing out which games are good.

#17 Edited by mbdoeden (163 posts) -

@crimsonavenger said:

I'm an American and I don't understand it. What happens if you don't have credit? I only have a Debit Card.

You should seriously consider getting a very low limit, no fee, basic credit card from your bank or somewhere like Amazon (they have a no annual fee Visa). Start using it for everyday purchases and pay it off every paycheck or month. The effect this has on your credit is well worth the effort. The more trust you gain with using your credit wisely means you'll have a SIGNIFICANTLY higher chance of being approved for car, house, or large personal loan.

The only way to lose is not to play (or fuck it up royally, but don't do that).

#18 Posted by Zelyre (1130 posts) -

I'm an American and I don't understand it. What happens if you don't have credit? I only have a Debit Card.

You don't get larger loans and if you do, you get horrible APRs. When I was renting an apartment, I had my credit checked. When I bought my house, I had my credit checked. Car? Credit checked. Unless you're making a -ton- of money and have a -ton- of liquid assets and can walk in with a suitcase with $30k in it, you'll have a difficult time buying any big money items without the seller trying to screw you over.

With an 800+ credit score, the bank gave me a sub 3% APR, waived a bunch of fees when setting up my mortgage and other credits which pretty much covered my closing costs, a higher interest rate on my savings and checking account. I bought a new washer and dryer at 30 months 0%apr. $2400 over a 12 month period time is easier to swallow than writing a check for $2400.

Having a credit card's not bad. Instead of putting your bank account on the line when making online purchases, you put your credit on the line. If your credit card number gets stolen, the funds that are being held isn't actually your money. You're not liable for it. Whereas your debit card? Some banks are real dicks about overdraft fees. With online credit card payments, it's easy to check your balance and pay it off. Just buy your gas on it and you'll be in much better shape than someone who buys their gas on a debit card.

Get a card with rewards and you're getting free money. Renting a place? See if you can put your rent on a credit card. Pay that off. Take an all expense paid trip using your credit card points where you can enjoy the luxury of the Motel 6 while you visit wonderful Indiana! (Find a credit card that has -good- rewards, or you'll get to chose between a trip to Indiana or a Star Wars episode 1 bobble head.)

#19 Posted by Video_Game_King (36090 posts) -

@extomar said:

it turns out that it is about as accurate as Metacritic is for pointing out which games are good.

A score of 84 even means the same thing between the two.

#20 Posted by falserelic (5334 posts) -

I've used a debit, but not a credit card yet.

#21 Edited by tourgen (4432 posts) -

Credit Rating in the USA is basically a cartel of 3 companies that collect massive amounts of personal financial (and much more!) information on individuals who borrow money. This information is used to rate the consumer to determine how risky of a bet they are - how likely they are to pay off future loans, and how much debt burden they can reasonable take on.

The reports are filthy with inaccuracies and outdated information that is next to impossible to get corrected or removed.

You essentially zero control over this information or who has access to it.

Your Credit Rating Score is a direct quantitative measurement of your worth as a human being. Or at least it can feel that way living in the USA. It's fucked.

#22 Posted by TyCobb (1947 posts) -

When you are looking to borrow $300,000 for a home, banks and credit unions need a way to determine what kind of risk you are. Have you had a car repossessed, constantly late on payments, etc.

What is fucked up about the whole thing is that when going to buy a house, the banks actually make you feel like you have a better chance of getting the loan if you are in more debt. I have always been very cautious of what I get on credit. I have a single credit card with a $1,000 limit that I have had for 11 years purely to have it. My car is paid off, along with other minor accounts from years ago. When I went to bank to get a home loan, they made me feel as though it was going to be hard to get it because I wasn't in debt. They wanted to see an active car loan and more than 1 credit card even though I make good money. Luckily the credit score shut them up and they gave me the money, but it was pretty nerve racking the first couple of times I spoke to them.

#23 Posted by Deathstriker (307 posts) -

@extomar said:

A mysterious and proprietary formula is used based on a number of factors by companies to give a "credit score". It is supposed to be an indicator of "credit worthiness" but it turns out that it is about as accurate as Metacritic is for pointing out which games are good.

Yeah, it's kind of a scam since people's own score is somewhat hidden from them and you or someone else looking at your score often can make it worse.

#24 Posted by Demoskinos (14586 posts) -

I mean I guess you don't need good credit to buy a house if you just have several hundred thousand dollars lying around.

Well I mean who doesn't?

#25 Posted by ShadowConqueror (3050 posts) -

You use someone else's money to buy stuff you don't need and then you pay them back and you do this a bunch of times until someone gives you a house or something.

#26 Edited by dudeglove (7688 posts) -

You're a bit late to the party if you're wanting in on all that hot subprime money.

#27 Edited by Fattony12000 (7096 posts) -
  • I have never had a credit card.
  • My partner has never had a credit card.
  • We have owned our own house and have been paying off our mortgage just fine these past few years.
  • #TheUnitedKingdomofGreatBritainandNorthernIreland
#28 Edited by CaLe (3916 posts) -

I was brought up to believe that credit cards are bad and are for people who are reckless with money. Any form of debt is bad, basically. I find it difficult to change my perspective on this.

#29 Edited by Zevvion (1830 posts) -

@cale said:

I was brought up to believe that credit cards are bad and are for people who are reckless with money. Any form of debt is bad, basically. I find it difficult to change my perspective on this.

It's the same where I live. Taking loans is looked down upon here, with some obvious exceptions like a house or starting a business. But taking out a loan to buy a PC for instance, is crazy. If you can't buy it with the money you have in the bank, you shouldn't buy it; is the message that is sent here. We do have credit cards, but most of them immediately take the funds out of your bank account. So it's more a convenience thing.

But you guys get a bill every month or something? And it's separate from your bank account?

#30 Posted by EXTomar (4519 posts) -

I don't mean that it is necessarily bad, but there is a general narrative that runs around the US pumped up by fringe elements that all debt is bad. On the contrary, debit is fine and even preferable in some cases because it is even more liquid than cash.

Buying a house on credit isn't a bad idea. Fixing your car that suddenly broke down on credit isn't a bad idea. Buying expensive lunches every day on credit is a bad idea. For a specific video game thing, buying consoles and games on credit is not a bad idea but it isn't great either where you are better off in this case saving and paying in cash for those purchases in stead.

#31 Posted by JasonR86 (9611 posts) -

Credit is the biggest fucking scam that we all simply except. Basically, one's credit history is supposed to represent how well one manages their finances. It's effected by how timely you are with paying bills, how much debt you have to your name (for example loans and one's credit card(s) balance), and how many credit cards you have to your name.

What's scam-y about it are all the arbitrary rules. If you don't get a credit card or take out a loan you won't have any credit history. This is worse then have somewhat poor credit because without any history you have no proof that you are able to pay your bills on time. This is an issue when applying for loans. When applying for a home loan, for example, that loan company is handing you a ton of money upfront with the assumption that you will pay it back in full plus interest. If you can't, they lose a ton of money and may go out of business if it happens to often. That's why there was that big housing issue years back. People were being loaned a ton of money that they were unable to pay back so they defaulted on their loans.

The way that loan companies know how to see if you can make bills is to look at your history making bills (ie the credit report) and your income to debt ratio. If it all works out, you get the loan. But with no credit history the loan company has no proof that you've made bills in the past, you'd be considered too risky to lend money to, and you wouldn't get the home loan.

So basically you need to be in debt and pay bills on that debt to own more things so you can be further in debt.

#32 Edited by Brackynews (4049 posts) -

@zevvion said:

Where I'm from they check your current job and what your salary is. They also check the contract (seeing how long you will be employed for) and they check any debt you might have. Then they decide with you how you're going to handle monthly payments.

In North America this same task is done by the credit sector/card companies, which conceivably makes the bank's job easier through a universal credit report. Realise that in the U.S. there are literally thousands of private banks, compared to maybe a dozen major credit card providers (not counting department stores, etc.) The process for determining risk is the same, but a different business sector handles it uniformly.

#33 Posted by Stilblad (87 posts) -

@cale: That is accurate though. If you are reckless with money credit cards will do way more harm than good by ensuring that you are constantly paying off interest on the debt you have accrued using that credit card. Just get a credit card and only allow yourself to use it for necessities, groceries and gas fit perfectly with using a credit card.

#34 Posted by CaLe (3916 posts) -

@stilblad: Maybe there's incentive to do that in America, but here most people would just use their Visa/Debit card that takes money directly from your bank account when paying for things like that. There's no worthwhile incentive for most people to use a credit card. I assume many Americans also use Visa/Debit cards over credit cards, but I don't exactly know.

#35 Posted by fisk0 (3874 posts) -
@stilblad said:

Just get a credit card and only allow yourself to use it for necessities, groceries and gas fit perfectly with using a credit card.

That's kinda crazy, it's pretty much the opposite of what a credit card would be used for here - where people would use it for more expensive purchases they may need a bit longer to pay off. I don't own a credit card though, and I'm not in a situation where I could ever afford a house, not even by the way of loans. House prices have consistently been rising here for the past few decades, to the point that I'd probably need to pay off a small home over the course of about a hundred years, if I paid a very large part of my salary every month.

#36 Posted by Darth_Navster (30 posts) -

Canadian here and I don't see why anyone wouldn't use a credit card, irrespective of credit scores. I carry a credit card and no cash and use it for all my purchases. I treat it like cash and pay the bill in full each month. That way I have an additional layer of protection from theft and I get to rack up air miles on everything I buy. I'm likely going on a trip for free this year because of it.

#37 Edited by jaycrockett (433 posts) -

I'm debt free and I don't have any credit cards. I don't need a credit score because I don't use credit, I pay cash for everything.

A Visa debit card has all the safeguards as a Visa credit card. There was a point maybe 10 years ago where some rental car places wouldn't take a debit card but that's long since passed.

Now, it will be interesting to see what happens when I buy my next house. Getting a loan for my current house wasn't a problem, but I did have one credit card at the time, we'll see.

If I can't get a mortgage for my next house when I'm paying 50-75% down, already own a home, have no debt and a steady job, well maybe that's a sign I need to move to a non-crazy country like Germany.

#38 Edited by AlexW00d (6195 posts) -

Companies making money off fools spending money, sounds like the American dream.

#39 Posted by TheRealMoot (356 posts) -

I'am now afraid of get a credit card and not having credit card after reading these posts.

#40 Edited by Brackynews (4049 posts) -

@cale said:

I assume many Americans also use Visa/Debit cards over credit cards, but I don't exactly know.

Well yes and no. Most consumers spend more money than they have (resulting in the consumer credit crisis).

Overall debt levels rose at the fastest rates seen since 2007, according to a new study by the Federal Reserve of New York

One of the most historically popular cards in the US has always been American Express, which has a very simple policy of you must pay the balance each month. This is known as a charge card which usually has an annual fee, since there is no profit from interest. AMEX has always had a simple screening policy of you must have a minimum verifiable income in order to qualify. "My dad said, as soon as you get a job, get an AMEX card." Goes their ads.

Debit cards (more accurately, VISA and MC debit cards) are a fairly recent (since 2005?) rise in popularity in the states as more banks opt in. Bank debit cards have been popular for decades in Canada, due to a small number of banks and a relatively uniform processing network (Interac). Since 2010, we have been seeing VISA branded debit cards issued, and if someone requests a new banking card, it automatically gets updated to work on the new system as well as Interac.