Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Is Natural Gas Price Ready For An April Rally? - 8th Apr 20
Market Predictions And The Business Implications - 8th Apr 20
When Will UK Coronavirus Crisis Imrpove - Infections and Deaths Trend Trajectory Analysis - 8th Apr 20
BBC Newsnight Focuses on Tory Leadership Whilst Boris Johnson Fights for his Life! - 8th Apr 20
The Big Short Guides us to What is Next for the Stock Market - 8th Apr 20
USD Index Sheds Light on the Upcoming Gold Move - 8th Apr 20
The Post CoronaVirus New Normal - 8th Apr 20
US Coronavirus Trend Trajectory Forecast Current State - 7th Apr 20
Boris Johnson Fighting for his Life In Intensive Care - UK Coronavirus Crisis - 7th Apr 20
Precious Metals Are About To Reset Like In 2008 – Gold Bugs, Buckle Up! - 7th Apr 20
Crude Oil's 2020 Crash: See What Helped (Some) Traders Pivot Just in Time - 7th Apr 20
Was the Fed Just Nationalized? - 7th Apr 20
Gold & Silver Mines Closed as Physical Silver Becomes “Most Undervalued Asset” - 7th Apr 20
US Coronavirus Blacktop Politics - 7th Apr 20
Coronavirus is America's "Pearl Harbour" Moment, There Will be a Reckoning With China - 6th Apr 20
Coronavirus Crisis Exposes Consequences of Fed Policy: Americans Have No Savings - 6th Apr 20
The Stock Market Is Not a Magic Money Machine - 6th Apr 20
Gold Stocks Crash, V-Bounce! - 6th Apr 20
How Can Writing Business Essay Help You In Business Analytics Skills - 6th Apr 20
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

In Praise of Credit Checks

Personal_Finance / Credit Cards & Scoring Oct 28, 2011 - 08:43 AM GMT

By: Jeffrey_A_Tucker

Personal_Finance

Best Financial Markets Analysis ArticleIt was maybe third grade when the schoolyard was abuzz with a terrible thing. It was called the "permanent record." If you did something bad enough, it would go on the permanent record. And then a one-day slip up would turn into a deep scar, a mortal sin that would last forever and permanently reduce your chances to make it in life.


We imagined some suited committee reaching deep into the file and discovering that we had loosened someone's fingers as they tried to climb the monkey bars, or that we bonked someone on the back with an eraser full of chalk, or that we started a dinner-roll fight in the lunchroom, or that we put a firecracker down the sink in the restroom.

Whatever the sin, if it went on the permanent record, it would never go away.

Probably there was no such thing. Or maybe there was and no one cared. For my part, I realized the dream of every public-school kid when, in the fifth grade, the entire school burned down — and my first thought was: so much for the permanent record!

But as we reach adulthood, we begin to realize that something like the "permanent record" does exist. It is called the credit report. Its assembly and maintenance involves no police, no bureaucrats, no government offices, no one paid by the taxpayer. It is unconcerned about your looks, your politics, your preferences, or your associations. It is entirely private, and it judges only one thing. It is put together because interested parties need to know.

You want to rent an apartment? Check the credit report. Want a car loan? We'll soon know how reliable you are. Want electricity to your home? You are not going to get it unless there is a reasonable expectation that you are going to pay for it. And the way to discover that is to examine your past.

Credit reports aren't perfect, and everyone has a story about some mistake. But the key point is that, because they are private, there is an incentive structure in place to fix errors and improve reporting. They strive to be as accurate as possible, because this is what lenders want. And it turns out that every detailed study has shown them to be incredibly accurate — and very good at dispute resolution.

And so, if you missed a payment on some bill, it's noted. If you skipped out on a lease, it is noted. If you bailed out of an obligation to pay a monthly payment on a car, and the car ends up being repossessed, it is there in black and white.

"The credit report links cause and effect in a beautiful way, rendering one of the oldest moral principles known to man into a convenient score that is attached to you and you alone."

Sure, it is a bit creepy. It's how we imagine it will be once we approach the pearly gates. All will be known. Our good looks, smile, and charm count for nothing. We will have to provide an accounting, blow by blow. The BS detector will be fully functional. By comparison, the breathalyzer is nothing. That kind of makes anyone bite the lip a bit.

And yet, think of it. No one comes to arrest you. There is no violence. You are not thrown in debtor's prison. No one puts a scarlet letter on you. All that a negative report can do is cause you not to be trusted with credit again. This is entirely reasonable. And there are ways to fix the problem. You can pay into a card account that debits cash rather than extending credit. And it is absolutely the case that every possible creditor is cheering for you to get your life in order. They want to extend credit. They want to do business. They have a direct interest in shaping up your moral character.

On the other hand, if you do the right thing and meet all your obligations as your contract them, you are handsomely rewarded. The more you behave, the more people trust you. The more certain it becomes that you will pay what you owe, the more people are going to extend you credit.

The truly wonderful thing about this system is that it is entirely private and results from the voluntary interaction of human beings in the marketplace. No one is forced into it. But if you choose to be part of the credit system, you must behave. You must do the right thing. You must not steal from others, which is what it really means not to pay your bills. The credit report is nothing other than a report on whether you tend to do what is right or what is wrong.

Thus is there no point in cursing the system or decrying it as an invasion of your life. The credit report is the best friend of the responsible in the same way that it is the worst enemy of the irresponsible. In other words, it tells the truth, and the truth can be good or bad for you depending on what is true.

I've rarely heard this system credited for raising the moral level of society. But surely it does. Yes, people should do the right thing whether or not there is a reward or punishment associated with an action. People should pay their bills even if failure to do so does not end up on the permanent record. But the inner drive to virtue can only take us so far. It is better to have systems in place that provide incentives to behave, with rewards for doing the right thing rather than the wrong thing.

This is what the credit-reporting system provides. In this, it is more effective than sermonizing, lectures, books on building character, advertising campaigns, or even surveillance. The credit report links cause and effect in a beautiful way, rendering one of the oldest moral principles known to man into a convenient score that is attached to you and you alone.

It so many ways, this system is a creature of capitalism, and it works beautifully. And compare it with the ghastly system created by the state, the elaborate apparatus to make sure that the government has forced us to cough up the maximum amount of wealth they say that we owe. One system tries to prevent thievery while the other system tries to make thievery more efficient. I can't imagine a better contrast in how institutions deal with human beings and the effect of those institutions on who we are and the choices we make.

This is just one example of the general principle: private markets reward good behavior and make us better people; public bureaucracies do the opposite.

Jeffrey Tucker is the editor of Mises.org. Send him mail. See Jeffrey A. Tucker's article archives. Comment on the blog.

© 2010 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules