FICO to incorporate buy-now-pay-later loans into credit scores

> Theoretically, credit should be used for one thing: to make more money.

I disagree.

You use credit to buy a car or buy a house when you don't have the cash to buy them up-front.

It's not so you can use them to make money, it's so you can use them to enjoy life.

> At some point, you run out of hours available and the house of cards collapses.

Only if you go too far. The point is to buy things knowing what they'll cost monthly and for how long, and to budget those as part of your monthly expenses. As long as you can always handle those, you will never run out of hours available and it's not a house of cards. Nothing collapses. You pay off your car; you pay off your mortgage.

You seem to be treating this as something black-and-white when it's not. It's an incredibly useful tool when used with budgeting. Not "to make more money" but to have a better life for you and your family for when it matters the most. Nobody wants to wait until the kids have graduated from college to be able to buy their first house.

And even with credit cards -- yes you generally want to be paying them off in full monthly. But if you want to take a vacation a couple months before you could otherwise fully pay for it, it's really nice to have that convenience too. Not to mention covering some expenses for a few months if you lose your job. They're a tool to be used responsibly.

> They're a tool to be used responsibly.

I used to hate to take the position that government should save people from themselves, but I've moderated a lot on it. Some people clearly cannot use credit responsibly.

Both transportation and shelter are important to earn money

If you're using credit to buy a car, most people do so in order to get to and from their place of work for the majority of their driving time. In that way, using credit to buy a car still fits into their theoretical model. For example I know plenty of people who completely got rid of their cars when remote work became more common, or at the very least consolidated to smaller cars or to less cars for a family.

Similar thinking for a house. A lot of people when buying a house go into it with the assumption that it is an appreciating asset that will gain value over time. Yes there are other factors of course like wanting to live closer to schools or in the suburbs/good areas, etc. But regardless this is commonly to facilitate a life that lends itself to you continuing to be able to make money comfortably.

Regarding vacations, no financial expert recommends using a card without the intention of not paying for it. If your plan is to book the vacation on credit for anything other than the benefits of your credit card points systems you might as well not use it at all. And all recommend not using credit cards and instead an emergency fund if you lose your job.

Let’s say you finance $40,000 in auto debt over 5 years. With a low interest rate of 6% paying $6,300 in interest. That’s over 15% of the amount borrowed! Many people have lager rates over longer periods.

Now consider what would happen if you invested that $6,300 for 30 years instead of spent it on interest. You’re losing out on tens of thousands of dollars in total lifetime wealth.

When you borrow money to “enjoy life” it can quickly end up costing 2x what it would if you spent the money outright, even if you borrowed at low rates.

Well seeing that you need a car to go to work to have money to invest in the first place…

And before you say “buy an old beater”, then you have to contend with an unreliable car that may cause you to be late to work and get fired. It’s also much easier and cheaper to get a car loan for a newish car than to borrow money to fix a car.

Im just encouraging people to do the math, and to consider borrowing smaller amounts of money over shorter periods of time.

No. You can rent and you can take the bus. Or rent and buy a crazy cheap old used car.

A house and a decent car are not primarily about making money. They're about your quality of life.

> And all recommend not using credit cards and instead an emergency fund if you lose your job.

And if you already used your emergency fund on, say, a medical emergency...?

Yes because American public transit is so great and now you have to get up hours earlier and come home later - not great if you have kids or you actually want to spend time with your significant other.

Also what happens when that cheap old car doesn’t start in the morning when you need to get to work or pick your kids up from day care/school or need to be home when they get off the bus?

Where are you going to get the money to fix that old car?

Its kind of funny how the people who don’t want to work with “lazy,” mangly, poor people with bad teeth are the first ones to tell poor people how they could’ve made interest on 6300 dollars over 30 years.

Lol what bus?

The trick is to borrow $40,000 to buy the car at 6% and keep your $40,000 invested making more than 6%. Even at 7% annually, you’d make $16,102 over five years (1.07⁵ × $40,000). For that matter, at 6.1% annually, you’d make $13,782 (1.061⁵ × $40,000). Heck, even at 5.9%, you’d make $13,277! The reason why you make more even with a lower rate is that you pay less interest each month with the amortising loan!

The trouble is if one borrows that $40,000 to buy a brand-new car (which will lose $16,000 over five years), or if one borrows that $40,000 and doesn’t have or doesn’t invest $40,000, or both. Life’s a lot easier if you already have the money.

This ignores the fundamental equation

    T = kM

where "T" is time, "M" is money, and k is some constant.

> You use credit to buy a car or buy a house when you don't have the cash to buy them up-front.

Still the same principle - you buy long-term asset that makes rent-equivalent money if you rented that otherwise. That is different than borrowing for immediate consumption.

Societies used to understand this and put lots of limits around exploiting people, such as banning interest rates. But there is no unalloyed good. That ban also blocked rapid economic development as seen in the 19th century, where credit was absolutely critical for railroad construction and other infrastructure like electric or plumbing.

It's a real dilemma with tradeoffs, where slogans and soundbites don't work. Having opportunity means you may squander it. Too many guardrails on life paths and behavior blocks meritocratic social mobility as well as opportunities and motivation.

Since conditions are changing too fast there is no appropriate crystallized wisdom about it. There is no wealth of myths that would define how to live. The best we are able to say is the non-instruction to "be free" and to tap into your authentic self and author your life path with freedom and agency.

In biology one can distinguish evolved traits and behaviors (instincts) from learned ones. The latter can adapt much faster to the situation. Even better than learning from environmental feedback over one's lifetime is planning and simulating possible futures and deciding based on that. Somewhere between the individual lifetime and the genetic evolution levels, there is also the level of culture that used to reshape much slower than a single lifetime, taking lessons and condensing them over generations into templates. But more amd more as we diverge from the ancestral environmental conditions of the savannah and hunting-gathering in tight knit tribes and clans, we can less and less rely on biological instinct, cultural bedrock, wisdom from the parents' generation, what you learned a decade ago, and so on. We are forced to adapt and outmaneuver the shifting landscape faster than ever. More and more things pulling in entirely opposite directions. A vortex of stimuli to cut through with a machete-like mental strength. But most people are not built for this, and even those who are, constantly have to gamble and guess and rely on luck and hindsight.

8 years ago I bought a house. My monthly rent was 1300 and mortgage/escrow/repair savings were instead 2000. Rent went up $100-$200 a year.

My son is looking for rentals in our same community and the equivalent rental to what I had is now around $3000.

Even ignoring appreciation, in the long term there was a cash flow savings.

> there was a cash flow savings

... in your case. There was a cash flow savings in your case.

I've moved several times and done the math each time. Sometime it's been more cost effective to own, sometimes to rent. There are a lot of factors that go into that calculation, and the math doesn't always fall on the side of buying. That's especially true if you don't expect to be in a house for decades.

Ban personal liability on loans (full recourse).

If the lender can only take the thing (like repossession of the car or foreclosure of the house) and can’t go after the borrower for the difference, lots of problems solve themselves.

Credit can still exist in various secured ways, business credit is barely impacted for real businesses, and people stop being able to go way below zero.

As a young person, I was in the “own an old beater” category for many years. That said, I knew how to maintain and repair most of what could go wrong. That stick shift 1995 Accord had over 300,000 miles when a school bus finally totaled it while parked.

But for most people, maybe not the right answer. There’s a middle ground. There are some very affordable vehicles out there with good warranties. Buy one and for a few hundred a month, you get five years free of worry.

Of course, who does that? What I see are mostly SUVs and other “image” vehicles that cost more to buy and more to run. Frugality just hasn’t been an American trait in recent years, though it seems to be changing in some groups.

> Societies used to understand this and put lots of limits around exploiting

They still do (at least in the US). Jewish people have access to Heter Iska loans according to their religion. They do not extend this to gentiles.

Humans have known for a long time usury is inherently predatory. Nobody should profit off simply having money.

It’s pretty rude to make personal assumptions based on a comment on the internet. My entire focus on the comment is providing education about the opportunity cost of borrowing money.

Personally borrow and invest over shorter periods of time (less than 10 years) has too high of a risk portfolio for me, especially with a depreciating asset.

What if there is a market downturn, and you’re out not only the decrease in value of your assets but also the interest in your loan. I admit this is down to personal preference and risk tolerance.

> My son is looking for rentals in our same community and the equivalent rental to what I had is now around $3000.

Good for you. Bad for your son or anyone living in your community.

You can't deny the strong ability to make money using credit or debt though.

No it's not the only way you can use it, but it's a pretty big way that a lot of people do successfully use it.

Well if you can't survive a downturn and the risk then no you shouldn't do it. But if you can then you should and in the long run you will end up ahead.

There’s also a second order effect of the people using easy loans/credit money leading to higher prices for everybody else. The cheap options will disappear if there’s a big chunk of the population that will go in debt to get the pricier option.

Why sell $1 tacos when customers are willing to Klarna an $8 burrito?

Why make a school with affordable tuition when students are willing to take out $100k loans?

Yep, I have never taken a loan out to buy a vehicle — even though I have always needed one to make money.

When I was working a pizza place, going to JuCo, I had a 10-speed bike for transportation. (Yeah, even in the shit Kansas winters, I was riding to JuCo along the just-plowed roads. Now get off my lawn!)

I think the problem is that we left exploitation of people under the umbrella of government open and so all the demand for exploitation has sailed under that flag.

You've got the tire companies lobbying states to up the tread depth for their safety inspections. The HVAC people got refrigerant restricted so that you have to be a license holder to buy it (artificially increasing demand for their service). The plumbing trade groups have a dozen states convinced that you need a license to install a gas dryer, etc, etc.

It's all the same "screw an extra buck out of the public" industry group and cartel behavior we had a century ago, but government just has a seat at the table and gets a cut this time around.

Agree. I wonder though if the tone of your comment doesn't come across as casting blame on the person who got the mortgage years ago.

You present some very daunting problems that the young and working class have to deal with (I know, I was both of those decades ago and struggled myself).

Credit to buy a new car though is still generally a bad solution. We should fix the other things you mentioned.

I would like to see laws allowing extreme low-cost vehicles (equivalent to golf carts, I guess) allowed on designated roads. A special inexpensive insurance proviso for them.

That you need something like $30K to buy a new car in the U.S. is insane.

My daughter went a year to and from work by bus in Omaha. Yeah, it sucked. But we should instead be trying to fix that rather than just tell people "Let them eat credit."

How are you going to safely have a golf cart on a highway? And what good is a car that can’t get you everywhere you need to go?

This definitely happens. It's like giving cheap loans to young couples who are having their first child, which was introduced in Hungary. But without more available housing, the market simply prices it in that suddenly people are able to pay more using this cheap credit, and supply and demand just makes it settle at a higher price.

Credit is basically a loan from the future. Except that's obviously impossible. Time travel doesn't exist, so it's just economic fiction. In the end the math has to add up in terms of real material goods and services right now. People can only reshuffle the goods among themselves, any trade with the future may be a useful fiction to simplify accounting but is obviously just fiction.

This is a bit like saving money for your retirement. It's a fiction. If there aren't enough young people working as nurses to put you in your diapers, then there simply aren't. A pensioner is not using the goods that they made decades ago. Their work dissipated there and then, and now decades later the only value they can consume is the one generated in real time by the actually existing working population.

And yet, the banker truly gives me value if I wish to start a business, or upgrade an existing one, and I don't have the capital to do so. I need money to make money, and am willing to pay for the privilege of using someone else's money.

The odds of two emergencies are low enough that you can ignore this. Not that it doesn't happen, but it isn't that common. If you expect two emergencies you should have more in the fund to cover it.

> > Theoretically, credit should be used for one thing: to make more money.

> I disagree.

> You use credit to buy a car or buy a house when you don't have the cash to buy them up-front.

There's no contradiction with GP here.

Financing a car or buying a house on mortgage might well save somebody money in the long term (e.g. by allowing them to take on a job to which they have to commute by car, or saving on future rent payments).

If that's the case (and that highly depends on individual circumstances), this still counts as "making more money" – via spending less money.

The real question is: How do you feel about borrowing money used to buy depreciating assets or consumables?

It's not intended to, although it is intended to be blunt.

> If you expect two emergencies

Emergencies are unexpected.

And a lot of people simply don't have the money to build up that kind of fund. To suggest that they "should" is to be pretty out-of-touch with the realities of a lot of people. Sometimes they need to rely on credit, because there aren't any alternatives. So that credit becomes a lifeline, a good thing.

Fixing takes time. I need to get to work today or else I'm fired and homeless in a few weeks.

> I would like to see laws allowing extreme low-cost vehicles (equivalent to golf carts, I guess) allowed on designated roads. A special inexpensive insurance proviso for them.

These already exist! You maybe haven't heard about them because they're largely a failure beyond niche applications. They're mostly used for things like hospitality shuttles, facility maintenance, meter maids, etc.

https://en.wikipedia.org/wiki/Low-speed_vehicle

https://en.wikipedia.org/wiki/Neighborhood_electric_vehicle

The problem is that they don't make sense for most people, e.g:

1. You can't operate them on high speed roads. The US has a lot of high speed roads, particularly in areas that are poorer.

2. They aren't cheaper than a used car. A street legal Cushman or GEM starts at about $16k. A brand new Nissan Versa is only about $1-2k more, is wildly better equipped, and has more accessible financing. Good $10k used cars are available on every street corner in every poor neighborhood with extremely accessible financing.

3. They are weird. It is much more socially acceptable to drive a similarly priced used car.

4. They lack features that used cars have. Many control cost by omitting basic features such as doors and climate control.

5. The places where you can use them (low speed neighborhood roads) are already more likely to be accessible by alternative means of transportation. (busses, bikes, walking)

To go between work and my apartment, I didn't need the highway. As I have said in another thread, I made do with a 10-speed bicycle, frcrisake. I don't expect everyone else to be able to do that though.

I don’t think you need to know a lot about cars to get good value out of them. I had an old ford ranger and all I did was get new tires when they tread wore off, get new brake pads when they started squeaking, and get the oil changed when the little sticker said to. I put 350k miles on that truck.

And if you are already living check to check, buying an old beater they you don’t know the condition of is more risky and harder to come up with the cash as things go wrong like the engine and the transmission.

It’s completely different than buying a slightly used car and keeping it forever where you know the wear and tear patterns on it and you know how you treat it.

> A street legal Cushman or GEM starts at about $16k

I see a business opportunity.

Where? 'cause I'm not seeing it.

I'm guessing you're taking issue with the price? Meh, that's just what it costs to make a decent product. You can (or at least used to be able to) get hot garbage manufactured abroad for less, but it doesn't meet the standards of what anyone would reasonably get, and they don't compare favorably to even a bad used car.

You might find this interesting:

https://www.youtube.com/watch?v=yRG0Wai4sR0

I remember when you could get a $10k new car... but if you adjust for inflation, we still have those cars today (now they're $20k), and they're actually better than the $10k cars back then.

How do you apply this to loans for things that cannot be repossessed, like college degrees or medical treatment?

> usury is inherently predatory. Nobody should profit off simply having money.

Well, the time value of money is a real thing.

While that is fine in the abstract:

Current 5 year CD APYs are 4.2-4.7%, while current new car auto loan APRs are 5.2-6.7%.

There is usually no magic spread to be captured unless you’re willing to take more risk (say, money in equities instead of CDs). Financing a depreciating asset against one that is volatile in the short term (and has seen drawdowns of 20% several times in the last 10 years) is a duration to risk mismatch.

That spread capture argument often is just justification for a bad decision - people don’t in practice use credit as liquidity backed by an investment, they use it as a cash advance to buy more car than they would absent financing.

So now instead of buying a $20k car cash, people will buy a $40k car, increasing their debt load against a depreciating asset.

In general, my theory is… if that small spread from borrowing to buy a depreciating asset makes a significant difference to you financially, you can’t afford that car anyway, and you’re better off buying cheaper.

Sorry to unload a bit… that wasn’t about you, that was about me being triggered by seeing this advice a lot :)

> There is usually no magic spread to be captured unless you’re willing to take more risk (say, money in equities instead of CDs).

Which is what one should do, provided one believes that the long-term result will be positive.

> Financing a depreciating asset against one that is volatile in the short term (and has seen drawdowns of 20% several times in the last 10 years) is a duration to risk mismatch.

Financing an asset and the value of an asset are independent. If one believes that one will get a better yield by investing than one could by avoiding financing, then one should finance. I believe that over time my investment returns will be higher than the current car loan rate.

> people don’t in practice use credit as liquidity backed by an investment, they use it as a cash advance to buy more car than they would absent financing … So now instead of buying a $20k car cash, people will buy a $40k car, increasing their debt load against a depreciating asset.

Yes, fools are foolish. A wise man makes educated predictions of the future. If his current total portfolio debt load can support financing a purchase, and if the rate to finance it is less than what he predicts his yield will be, then he’ll finance it.

> if that small spread from borrowing to buy a depreciating asset makes a significant difference to you

Hey, an extra 1% a year for the duration of one’s working life adds up quite significantly! The key is to carefully manage one’s expenses and balance sheet, maintaining a healthy debt ratio, only incurring debt when it makes sense, and refinancing or paying it down when that makes sense.

All totally valid points. If used responsibly across all those elements, within someone’s budget, with the ability to tolerate the risk… I can see the case for financing. I just think most people don’t quite use car loans that way… hence the proliferation of 72 month+ loans. (But then, they’re adults who can make their own decisions, so fair enough. They would probably say I’m risk averse, anyway.)

> Hey, an extra 1% a year for the duration of one’s working life adds up quite significantly!

I agree - but in this case, you’re not really netting an extra 1% per year forever… in that example, you’re saying you’d have a car payment for your entire working life! And a long period of buying depreciating assets I think is going to hurt a lot more in the long run than the 1% spread :)

That being said, I get that purchases are not always spreadsheet math. So maybe someone is willing to spend a little more over time to drive newer cars, and that’s up to them.