Credit Scores and Committed Relationships

http://www.brookings.edu/research/papers/2015/10/02-credit-scores-committed-relationships-dokko

by T-A • 11 years ago

30 38 11 years ago

Credit scores are like g in that they are highly predictive of a wide range of seeming unrelated human activities. I am always amazed at how humans are so predictable from such simple scores.

logicchains2• 11 years ago

Credit scores and match quality appear predictive of subsequent separations even beyond these credit channels, suggesting that credit scores reveal an individual's relationship skill and level of commitment.

From an economic perspective this looks like time preference. Individuals who place a greater value on enjoyment in the present compared to enjoyment at some time in future are less likely to save money for the future, preferring to enjoy it now, and are also less likely to persist through the difficult parts of a relationship in pursuit of some future benefit from having a lasting relationship. I prefer the economic perspective as it's more impartial, and doesn't make the assumption that lack of "relationship skill" is the cause of relationship failure.

danieltillett10• 11 years ago

I thought credit scores were more influenced by payment promptness and reliability rather than saving propensity. Isn’t one of the problems with people with high savings and no debt is that their credit score is lowish purely because they don’t have any evidence of prompt payment of debt?

logicchains2• 11 years ago

You may be right actually, I didn't consider that. I'm Australian and here I think the system works a bit differently, so banks and whatnot will take into account your savings history when determining whether to loan you money.

It's still the case in the US though that someone who saves will do a better job of payment reliability than someone who borrows the same amount of money but doesn't save, as the former will always have savings on hand with which to make repayments, while the latter may not.

sksk6• 11 years ago

While your statement about payment promptness is correct, people with good scores tend to save more than others (scores do not use savings or income or wealth into account, however).

Credit scores only penalize you when you don't have any credit but most of these good score folks tend to have (or had) a mortgage or have had auto loans, etc. Just because they are not actively opening new accounts does not mean they will be penalized -- credit scores look at pretty much everything in your report and they get credit for their historical good behavior.

Another thing to consider is that good credit scores leads to a positive cycle: you don't pay high interest rates on your loans and the extra money saved here allows you to pay down obligations faster, which in turn allows you to save more in the long run.

sksk6• 11 years ago

This is a very interesting study. Anyone who has worked in the consumer credit industry will know that credit scores are correlated with a whole bunch of things -- your standard credit default to insurance claims to employment. Anytime you need to identify 'responsible' individuals, credit scores can act as a pretty good proxy although using credit scores is legally kosher only in certain situations.

I think their trustworthiness hypothesis is probably weaker than other parts of their analysis. I have my own hypothesis based on my experience working in this industry: Staying in a committed relationship may not be really about 'responsible' behavior but could be due to similarity of financial management styles. Most marriage counselors talk about 'sorting out your finances' before getting married; credit scores are essentially capturing that issue -- people who have very good credit scores tend to be savers (although credit scores do not use income or wealth into account) and ones who have poor scores tend to be financially poor and for the large part spend more than they can afford. Also people with good scores tend to be manage finances in a particular way -- pay bills early, monitor balances regularly, etc. -- while the ones with poor credit scores do not usually pay much attention to finances and miss payments frequently.

When you have two people with two different styles of managing money, it can lead to a strained relationship and subsequently lead to separation.

danieltillett10• 11 years ago

Does it help a relationship if you have two non-savers together? As you rightly point out, money problems are major cause of relationship conflict and breakdown, but are these less common if you have two reckless spenders in a relationship rather than just one? I would have thought that having two reckless spenders would just accelerate the process of hitting money problems.

sksk6• 11 years ago

That's a good question and I was thinking about the same when I read the paper. I have never investigated this aspect of credit scores in my career so don't really know the answer. My guess is people who have similar score, even if it is bad, probably tolerate each other more than when they have very different styles. I am not sure if the paper looks at this deeply (they seem to only compare differentials and stdev at formation).

ap22213• 11 years ago

To me, it's simpler. You have people who 'believe' in the current system and their role in keeping it stable and sustainable. And, you have people who don't believe or just don't care.

I am unfortunately a believer. I've always wanted to disregard the whole silly, archaic system, but I can't. I'm very 'responsible' by nurture. My spouse is also a believer. We have a very stable relationship, we're very responsible, trustable, and, of course, have perfect credit scores all because of our silly beliefs.

hueving• 11 years ago

You have people who 'believe' in the current system and their role in keeping it stable and sustainable.

I'm not sure what you mean by 'believe' but it makes it sound like there aren't obvious, objective benefits to paying bills and having a good credit score. I don't like the system either, but it results in me not having to pay higher interest rates on loans, not having to put down large deposits for rent, getting to purchase things on credit, etc.

pm90• 11 years ago

I think what contributes to separation is a feeling by one party that the other one is "not responsible" with money. As with everything else, they then have to make a choice: let that affect the relationship, or not. There is also the fact that if one party earns way more than the other, then its bound to affect the relationship, especially in modern societies which believe in financial independence as a pillar of personal achievement.

austrian5• 11 years ago

Companies in America repeatedly charge people $10, $50, $200 or more than they should have, and then you either have to pay to hire a lawyer or pay them. If you don't then you get a bad credit score, and all the other companies that use the credit system will charge you more.

In Austria, credit bureaus like in America are seen as corrupt and criminal. China also doesn't have a central credit bureau.

I feel bad for every american when I hear intelligent people muse about making it more complex. You are just increasing the ability of companies to walk on the poor. This creates a bad bottom end of society, which America suffers from and Austria does not.

America has crumbling cities like Detroit, and it's because of the criminal thieving credit bureau, but here in this thread we have lots of people talking about the credit bureau without even taking civilization into account.

hugh43• 11 years ago

That's rather a long bow to draw based on the occasional overcharge (which you should be able to get your credit card company to reverse anyway).

austrian5• 11 years ago

No its not. I imagine there are millions of lower class people in America that get charged an extra $50-$500 every month with a dare to hire a lawyer or take a hit on their credit score, of which they can take neither, so they pay a thief his made up fees. There's probably other examples of this I could imagine. Without even speaking about the psychological trauma that is present here, it looks about as criminal as stealing lunch money from random people.

This isn't civilized behavior and it should not be tolerated in the USA.

kornork• 11 years ago

Sorry if I'm not following, but which companies are you talking about which overcharge people?

If companies are overcharging people, how does this make the credit bureau corrupt or thieving?

jboggan• 11 years ago

So we need to make a new dating app that matches you by your credit score?

Credit Scores and Committed Relationships

Related Stories