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I'm not form the U.S but I know about the dreaded "credit score" that haunts Americans. I've seen a lot of documentaries and videos on YouTube with people that can't get a loan to buy a house because of bad decisions in the past that affected their credit score. But I've also seen a lot of documentaries and videos where people are in over their heads in debt, debt that they might never repay and it's just getting worse.

We have a similar score in my country used when one want to take a loan but it works somehow differently. For example:

• if I have no credit score (i.e. I have never took on any loans, I don't have credit cards, etc) then to a bank that's a good thing. I need to prove I can pay back the interest on the loans by providing income reports and that's that. I can take for example a mortgage loan just fine like this. But not in the U.S though. If you have no credit score then most likely you won't get a mortgage loan. If you've never had debt somehow it's bad in the U.S. I don't get this.


• this score in my country is an indicator of how much I can borrow. The more loans I have, the less loans I can get. If all my loan repayments sum up to more than 40% of my income then no more loans for me. In the U.S. though, I see people making 20K an year but have credit card debt of 90K. How is this possible? How can you get more loans when the ones you already have are way over what you can ever pay back?


• if you are bad at repaying your debts then you get a bad credit score and you can't get any more loans. From this regard the measurement in my country and the U.S. is similar. This is what I think a credit score should work.

That's a few details to understand where I'm coming from. So I guess, my question is. How can Americans can get into so much debt and why isn't the "credit score" putting a cap on it?

A "credit score" in my country limits the extra debt you can take if you are already in debt. In The U.S. though, it seems that the "credit score" allows you to get even more debt if you already have a lot of debt. Paying the minimum monthly payment on all your credit cards and rolling the interest payments into the future somehow seems "responsible" behavior but having no debt is seen as "suspicious" and people are afraid to give you loans because they don't know how you will behave. Somehow the dude that has more loans than what he makes an year can get more loans.

Can somehow add a layman explanation on how Americans can be so much in debt but have good "credit score" that allows them to borrow even more?

Can somehow add a layman explanation on how Americans can be so much in debt but have good "credit score" that allows them to borrow even more?

A credit score measures the risk of not making monthly payments.

That's all. Nothing more.

I think the heart of the matter is that you're misinterpreting both what comprises a credit score in the US, and how they are used. This is evident in your second to last paragraph:

A "credit score" in my country limits the extra debt you can take if you are already in debt. In The U.S. though, it seems that the "credit score" allows you to get even more debt if you already have a lot of debt. Paying the minimum monthly payment on all your credit cards and rolling the interest payments into the future somehow seems "responsible" behavior but having no debt is seen as "suspicious" and people are afraid to give you loans because they don't know how you will behave. Somehow the dude that has more loans than what he makes an year can get more loans.

Credit scores are meant to be predictors of risk in the sense of using past behavior to predict future behavior. The models are built on training data which helps determine what data points about past behaviors can help us predict future behaviors. There's plenty of info on the web if you're interesting in knowing what specific factors are used.

Lending decisions aren't made purely on risk though. They're also made on cash flow. If you're trying to take out a new loan, a lender will check your credit score to help them decide how to price the loan, if you're approved (riskier people will get a higher interest rate). They'll look at other factors to determine if you can afford a loan, i.e. debt to income ratio.

The point is, the credit score alone is not the decision factor used by a lender. It's not intended to be a sole indicator of creditworthiness. People who rack up a lot of debt may still have "good" financial habits. They may always pay everything on time and may never cause a loss. They may have a great credit score. However, they may not be able to afford any more loans on their current income. Or, they may have a really high income and could easily make payments on a new loan. Their credit score isn't meant to tell you which situation they're in.

You didn't tell us where you're located or the inner workings of credit scores in your jurisdiction, but it sounds like your credit score is meant to indicate risk and affordability. That's a significant difference.

To get back to the statements you made at the beginning of your post,

I'm not form the U.S but I know about the dreaded "credit score" that haunts Americans. I've seen a lot of documentaries and videos on YouTube with people that can't get a loan to buy a house because of bad decisions in the past that affected their credit score. But I've also seen a lot of documentaries and videos where people are in over their heads in debt, debt that they might never repay and it's just getting worse.

It's probably not reasonable to evaluate the lending practices in any country based on (potentially sensationalized or inaccurate) videos on YouTube. You gave an example,

I see people making 20K an year but have credit card debt of 90K

It's likely that either that person's income or other factor has changed recently, or they were creative (dishonest) in their loan applications, or they had a cosignor you don't know about, or there was some other mitigating factor. Anecdotal stories of the system "failing" to cut someone off don't inherently condemn the system, and it's almost certainly true that any other lending system or credit scoring system (including the one local to you) also has stories of people getting upside down in debt.

In the U.S. though, I see people making 20K an year but have credit card debt of 90K. How is this possible?

You don't see that. I don't know what sort of fear-mongering sympathy extracting nonsense you've seen on the internet, it is not common at all for someone earning $20k to have $90k of credit card debt. In fact, at $20k of income a normal limit would a few thousand. That person lost their job or most of the debt is student loan related (because underwriting for student debt throws away the obvious income driven risk assumptions thanks to government support).

Credit score measures your history of repaying your obligations, that's it. Your credit score doesn't know your income. There are lots of people who seek, needlessly, to optimize their credit score by having the "right" blend of debt and the "right" utilization. But all a credit report lists is your:

• reported debts (some debts aren't reported, interpersonal promissory notes being the most obvious example)


• the original balance (in the case of installment loans)


• the high balance (in the case of revolving debt)


• the current balance


• a minimum payment due


• whether or not the account is in good standing


• history of payment

It doesn't know your income history, level of education, whether or not your under/over paid, etc. If you want a car loan, the lender is going to request your employment information and some proof of income. That lender's underwriters will determine whether or not it's reasonable to assume you'll properly service the debt. Your score will be used primarily to set an interest rate, but your proof of income will be used to assess whether or not to issue the loan at all.

Paying the minimum monthly payment on all your credit cards and rolling the interest payments into the future somehow seems "responsible" behavior

The minimum payment on a credit card in the US will include the interest due. A normal minimum payment is interest plus 1% of principal.

The debt systems in many countries differ in a lot of very interesting ways, a lot of times, these differences are really in the details. To some extent these differences are cultural. There are pros and cons to everything.

In general I'll agree with you that a lot of people have bitten off more than they can chew and in some cases it's not clear who's really at fault. The whole point of debt is that you commit future earnings/productivity for liquidity now. Zero people should be buying a TV on a credit card that's not being paid in full. That TV, that dinner, those shoes, won't get more valuable as time goes on. It's one thing to use debt to buy a more expensive more reliable car than you could with cash because the car will facilitate your productivity. It's one thing for a company to borrow money to expand rather than waiting to fill the war-chest because it can be important to beat competitors to market, so giving up some of the future profit is worth it. But, I've heard the craziest rationalizations for consumer debt spending.

I think getting in to debt problems when you're young is far too common in the US. A $1,000 debt at 20% interest is $16.67 per month of interest. When I was working my very first job $16 was the better part of 2 hours of work, before taxes. $1,000 feels small. The "problem" is not the ones you illustrate. The problem is young and poor people committing 2 hours of work every month to service the interest on the TV, night out at the club, wheels for their car, they bought on their credit card. Young people get crushed by somewhat inadvertently committing relatively huge amounts of their productivity to service interest for innocuous consumer goods. In these situations it's not really clear who's at fault. Kids just don't understand that $1,000 is actually a difficult hole to fill at $8/hour.

But there's another group of young people today are giving postmates their credit card to spend $9 in taxes and service fees and $5 tipping the driver for a $12 sandwich so they "can work an extra 30 mins" because it's "less expensive when you consider my time." It's these folks that will also complain about their student loans while they lease a $6,000/year car. Then lose their $120k/year job for whatever reason when they have $90k of debt (comprised of watches, jewelry, clothes and vacations) and become the example you heard about. My grandparents, who lived through the depression, would have bought the ingredients for the sandwich from the grocery for less than these folks tip the delivery driver and spent a couple minutes preparing lunch for themselves, then saved the rest. There's been a culture shift.

Banks use statistics to underwrite large pools of people. None of the examples above is a "problem" for the bank. The bank knows X% of people will never pay the money back, it's built in. The issue is the stories are sad for the individuals who populate the X% of people who default. There are the genuine people who are hit with some unfortunate circumstance beyond their control and it crushes their finances. For every one of those stories there are 100 of someone who just made a long series of bad spending decisions until the situation became unsustainable then some catalyst event, like a job loss, causes the financial house of cards to collapse. But rest assured, for almost everyone with debt problems, their problem was not that they lost their job, their problem was spending and not saving. And spending habits are not included in credit score.