They significantly improve the ability of a lender to model the default risk associated with a borrower, which results in lower borrowing costs for higher quality customers, as well as stopping debt spirals for people struggling.

In the absence of credit scores, higher quality borrowers will be charged higher interest rates or require higher collateral, since they are less differentiated from average quality borrowers, and/or access to credit will be restricted to a narrower proportion of the population.

Shouldn’t those costs be higher because of the increased risks they represent? If someone has a habit of not paying their debts, why would a lender take on the higher risk without getting paid more? They wouldn’t, so they simply won’t loan the money.

However on the other side of this, nobody has to borrow money. If you don’t borrow, credit scores are irrelevant.

Except if they want their own place to live.

And for the period of about a decade or two, if they want to buy anything over the Internet. For some reason, e-commerce in its early years would only accept credit cards. Took quite a while before debit cards started working for on-line shopping, and by that time, the damage was already done - credit cards got a boost in popularity both in the US and worldwide.

I am used to the word "bias" meaning a specific kind of inaccuracy.

Given we're talking about alternatives here, I think this should be: "In the absence of credit scores, or some other mechanism for comparing potential borrowers". There's lots of ways to compare borrowers, and if you assume credit scores are the only way to do it, all your solutions are going to involve them.

Loans involve the calculation of parameters. You can either choose those implicitly through personal knowledge, or explicitly through a scalar metric (credit score). There is no viable third option, and the first option is just a bad version of the second, in the end.

It's worth pointing out that credit scores actually are actually just the P(^default) expressed on an integer rather than fractional scale.

There's also multiple credit scores, there are the scores computed by credit bureaus which look at your P(default) against all lenders, but many lenders also compute their own internal credit scores using models trained against their own customer base (and possibly also taking into account additional data that they hold about you).

I live in a Central European country.

The other advantage over credit scores is that people willingly give their information out and are able to understand the banks decision.

That's really what's driving support for credit scores, isn't it? That they provide some some people the (perception of an) ability to prove their character, their moral superiority, and to feel rewarded for all their hard sacrifices.

Similar, I believe, to credit cards and all those rewards and air miles shenanigans - everyone feels they're gonna be winners, so they support a private tax on everyone.

For example, credit card points are a zero sum game. Credit scores are not. Everyone could be creditworthy, but many are not, and it’s highly beneficial to the entire system to be able to identify which group a person fits into (including for the person who isn’t creditworthy!)

My mind isn't made on credit scores, though I do feel it might be a case similar to insurance - it's not strictly a zero-sum game, but it's also socially harmful to have such a system be 100% efficient. I.e. with insurance, if everyone was correctly pooled into small bucket that near-perfectly reflects their actual risk profile, insurance would stop making sense - those who need it most wouldn't be able to afford it, and those who could afford it need it the least and would be better off putting that money into savings accounts.

There's a lot of areas in the economy where increasing efficiency past some point just makes systems inhumane and exacerbates social problems.

I feel default risk estimation may just be like that - the more reliable you want your credit score, the more invasive you need to be wrt. what information you collect and how you do it; meanwhile, the system becomes less and less tolerant of mistakes and unfortunate circumstances, while also exerting more control over how people live their lives.

Already the US credit score makes people obsessed about credit, and getting credit cards and loans to improve/game their credit scores with their future mortgage in mind. That very much affects people's life choices at scale. I don't think having everyone leading their lives to optimize their credit score is a way to have a healthy society; conversely, maybe letting the lenders eat a little more risk, and the wealthiest (and most responsible with money, and most morally superior) have a little smaller line, actually improves overall well-being.

> Already the US credit score makes people obsessed about credit, and getting credit cards and loans to improve/game their credit scores with their future mortgage in mind

I've encountered very, very few people doing this to an inappropriate degree (obviously yes you should consistently demonstrate creditworthiness, that's not gaming though). Anecdotally, the people I see doing this are actually seriously not creditworthy. A whole lot of "you bought 3 cars and fucked your score, here's how to dig your way out." But like... the evidence actually shows you can't be trusted with credit!

I don't disagree with any of your big picture concerns about the system and the possible edge cases or distortions of priorities. I just haven't seen evidence those are huge problems relative to the value of the system.

Average interest rate on mortgages in Spain with this system appears to be _half_ that of the US, so it seems this isn't so ineffective that premiums have to spike to match. (is that right? https://www.bankrate.com/mortgages/mortgage-rates/ suggests 6% interest mortgages is a current average in the USA while Spain is below 3% now - personal anecdotes plus gov stats shows 3.25% average on all issued mortgages in 2024: https://ine.es/dyngs/INEbase/en/operacion.htm?c=Estadistica_...)

Spain also enforces a much stricter debt to income ratio, which means it’s much harder to get loans for people that already have debt, which means the risk profile is reduced for those that do get approved.

Also Spain’s unemployment is among the highest in the EU — and almost three times higher than the U.S., so the central bank’s lower interest rates reflect less of a concern over inflation and more of a concern towards encouraging growth. The low interest rates in Spain aren’t a reflection of reduced risk but of lower central bank rates. You could get 30 year mortgages in the U.S. just a few years ago approaching 2%.

Comparing mortgage rates across countries is a pointless endeavor because the macroeconomic circumstances are vastly different. For example, one would think that lower interest rates would result in a increase of housing supply in Spain as investors build more housing because the loans would be cheaper — however that isn’t the case because of the post-tax return on investment (and regulatory risk) for real estate is far worse than an equivalent investment in the United States despite higher lending costs. A €10 million housing project in Spain has a lower ROI than the same project would in North Carolina. Interest rates could be zero in Spain and it wouldn’t change the housing market much because of the myriad of other factors that go into the spreadsheet.

Also almost all the things GP listed apply all across Europe. So the "Spain character assassination" exercise is pointless.

We do have a centralized registry of "bad debtors" and that has a highly negative effect on your ability to get a loan.

Any EU country - regulations tend to be strict and vary from country to country. There is usually a central registry with either history of violated agreements and/or currently active loans. In pre-approval for a loan the borrower typically self-declares their credit capacity and the lender checks the registry for red flags. Before concluding the approval the lender will require supporting documentation (typically salary certificate, bank statement and/or tax returns).

There are still credit bureaus, and things like defaults, judgements, etc are recorded, and when you apply for credit this is checked.

However there are crucial differences to a score system like the UK and (I assume) the US - there is no 'building good credit', you don't get any benefit from having existing credit products and using them well. In fact the opposite - having other forms of credit like a credit card available is seen as a negative when you apply for a mortgage and will impact the amount you can get loaned. They'll literally knock the credit card limit off the top of the mortgage offer.

In Spain they look at your last few months of bank movements and calculate how much to loan you (usually something like max a third of your income can go to mortgage payments)

There is some risk to the bank because the house may have declined in value and it may be tricky to sell it when you default. That's why they do a risk assessment, but it can be a lot less invasive than for providing a personal loan for an education.

Which is another thing we don't do over here in the EU.

Perhaps what's left doesn't necessitate a full-blown credit score system?

So instead a local credit union got a free $1500 for servicing that loan. A loan that I explicitly only took to "build credit" ie, pay a bank profit so they would vouch for me, which is what a credit score is designed to show, how much profit you give to banks and credit card companies for financing.

They don't want to loan out money that might be less profitable than a loan to someone who has paid a thousand credit card payments.

The credit union then proceeded to Not report my loan to the credit agencies! meaning I still have no credit. Awesome.

But anyway, I wonder what the housing market would do if mortgages weren’t possible to get. I bet the prices would go down.

"Following the Panic of 1837, the first commercial credit reporting organizations formed."

It only took a financial crisis and 3-year-long depression for people to realize that credit is important.

Here in Sweden we don’t have it. When you apply for a new loan the bank can request information of other debts you have. And you have to send info about your income and answer questions about your expenses (living costs, number of children living at home, etc).