When you look at it as a whole, it seems that way.. there's no other reason to set up the incentives that way.. I understand missed payments, late payments and bankruptcy should have a big negative impact on your score.. but a 6 month gap in your credit history should not be set up to hurt your score that much, then again, I just showed one way to get around it easily..

What bothers me though, is how strong income & a high net worth won't impact your score as much as a historical trend of paying (on time, consistently, and over the minumum)..

If I had to look at a person's income & net worth (Assets - Liabilities).. It's pretty easy to already see which people are able to make good on their debt.. In my opinion, those two first indicators should have the most weight on your score.. however, financiers raise a different argument..

(Look at Trump): "Yes, that's the argument".. Here's an individual who was very solvent, more than had the net worth to support additional debt, more than had a steady flow of income to support the monthly payments.. But has filed for bankruptcy twice, has postponed payments on his debt for over a year, and is now able to file for bankruptcy again if he wanted to.. The argument is.. "given his history alone, is this someone you would want to lend to?"

My counterargument to that is, that the "reason" for such a history is conditional.. The main factors that cause such a situation is the borrower taking on too much risk; poor risk management & risk analysis.. If you go in for a small-business loan today (nevermind a loan for a larger business).. the banks will eat you alive for questions about the nature of the business, the experience of the owners and managers involved, proof that all regulations and licensing requirements have been satisfied, projected financial statements of the business, or actual financial statemtents of the business (which you'll have to convert to accrual, and then perhaps agree to have the banks auditors proform a review for some level of assurance on your financial statements).. The most important question is.. "What do you want to do with the money?".. Yes, they know you make a lot of money each month, they can see you have plenty of assets and not too many liabilities.. they can see that.. but they want to know what you're going to do with the money.. and ask themselves if they can reasonably expect to recover.. This is something each bank must ask itself before it issues such a small-busienss loan, especially to a new business.. A credit history is actually a poor indicator of future preformance, because no venture is exactly the same, and it doesn't guarantee to any degree the same history in the future (because such history is circumstantial).. The bank will be in a better position to gauge the credit risk it's taking right there and then by reviewing all the details, rather than placing so much reliance on the limited information credit history can provide..

Ironically, an excellent example for this counterargument is.. (Student Loans)

Students who don't even have credit yet, can still get student loans.. Because lenders know what they are using the money for.. their use is limited, it's in the agreement.. lenders know the student can't ever wipe out the debt by bankruptcy.. and that after attaining a higher education, will be earning more money and be able to pay back such debt.. Those details are already incorporated into standard student loan agreements.. which is why it's fairly easy to get a student loan.. the credit score doesn't affect a bank's willingness to issue the loan at all.. the only thing it affects, is the interest rate at which it will be issued at..

But again, for student loans, this is not justified.. (there's federal legislation in place to give lenders enough assurance that they will get their money back..).. Any risk they are taking is obvious at the time the contract is made.. Bankers can easily say that if they wouldn't get a higher interest rate to cover the additional risk, they would never issue such loans to some students with no credit history.. But all real risk is exposed and obvious at the time of contract, credit history is not a real indicator of risk the bank is taking.. But i'll tell you why they want it.. Here's the real reason..

It's assurance.. If you don't pay, they'll hurt your credit score.. It's that simple.. And a person who has no credit or bad credit could care less.. but a person with good credit cares more.. So when you bring your father or mother with you to co-sign on the loan.. The bank now feels that it has one more string they can pull if payments start to go sour.. and the more strings it can pull, the lower your interest rate.. They will argue that they are now taking on lower risk, but in reality.. the risk is the same, they just got additional assurance..

There's one justification for the credit reporting system however, which is why it's still the way it is, because this justification is HUGE.. Credit Cards..

Yup.. when you charge something on plastic.. it's unsecured debt.. it's not tied to some asset the lender of those funds can take away from you and try and recover from.. no.. the lender is taking your word on it.. that you'll pay them back.. But if i'm a lender.. it's not practical for me to ask my borrowers, "do you really need that extra gallon of milk in your grocery bag? she's not that interested in you, are you sure you want to pay for her dinner? how well do you manage your personal expenses? can you really afford a car right now? etc.." There are thousands of questions to ask, and millions of customers to ask them to.. But to speed up the process, good indicators are obtained during your credit application process (income, social-security to look up your assets & outstanding debt, and occupation which is linked to both income and financial management "that's right, professional occupations enjoy a lower rate on credit cards").. And credit history is really the only up-to-date indicator these companies can rely on, and adjust their rate accordingly.. If you don't pay.. they can take you to court and issue an order to demand that you pay (which still means they don't have your money).. and then again, if you don't pay, they can only harrass you until you either do or file for bankruptcy.. But if you have "good credit".. this (1). shows them that you do pay in a manner which would be good for them as a lender, (2). you have incentives in place that motivate you to pay in order to maintain your credit score, which means that they have some assurance that you will not miss payments because that would negatively impact your credit score (But again, throw that last little point to the financier's Trump argument).. This is why credit card interest is so high.. 7%-29.99% APR (compounding DAILY).. That can translate to as much as 34.96% effective annual interest on such debt (an extra 5% bonus for your credit card company, and all they had to do was use the term APR instead of APY on your agreement) Don't you just love them?

Best,

GrkScorp

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If you can't stop the Wind, then you can't stop the Storm.