Credit
Understanding credit, liabilities, and the closed-source nature of credit systems
What is Credit?
Simple Definition
Credit is the ability to borrow money or access goods and services with the promise to pay later. It allows you to spend money you don't currently have, with the agreement to repay it (usually with interest).
⚠️ Credit is a Liability
Credit is money you owe, not money you own. It's a liability that decreases your net worth.Every dollar of credit increases what you owe, making you poorer, not richer.
Real-World Example
When you use a credit card to buy something for $100, you don't have $100. You've borrowed $100 and now owe $100 (plus interest) to the credit card company. Your net worth decreases by $100.
Three Key Characteristics of Credit
1. Credit is a Liability
Credit represents money you owe, not money you own. It appears on your balance sheet as a liability, reducing your net worth.
2. Credit is Closed Source
Credit systems are proprietary and opaque. You can't see how credit scores are calculated, how approval decisions are made, or verify the fairness of the system.
3. Credit Requires a Relationship
You can't use credit anonymously. You must establish and maintain a relationship with a financial institution, sharing personal information and building credit history.
Credit is a Liability
💸 What is a Liability?
A liability is something you owe - money you must pay to someone else. Credit creates liabilities because when you borrow, you owe that money back.
📊 Impact on Net Worth
Net Worth = Assets - Liabilities
Credit increases your liabilities, which decreases your net worth. If you borrow $1,000, your liabilities increase by $1,000, making you $1,000 poorer (not richer).
⚠️ Common Misconception
Many people think credit increases their purchasing power, which is true in the short term. But it also increases what you owe, making you poorer overall. Credit doesn't make you rich - it makes you indebted.
Example: Credit Card Purchase
Credit is Closed Source
🔒 What Does "Closed Source" Mean?
Closed source means the system is proprietary and secret. You can't see how it works, verify its fairness, or audit its decisions. The code, algorithms, and processes are hidden from you.
📊 Credit Scores are Secret
Credit bureaus (Equifax, Experian, TransUnion) calculate your credit score using proprietary algorithms. You can see your score, but you can't see:
- How the score is calculated
- Why it changed
- If the calculation is fair or accurate
- How to optimize it beyond general advice
🤐 Approval Decisions are Opaque
When you apply for credit, lenders use secret algorithms to decide:
- Whether to approve or deny you
- What interest rate to charge
- What credit limit to give
- Why you were treated differently than others
You can't verify these decisions are fair or accurate.
⚠️ The Problem with Closed Source
Closed-source credit systems create information asymmetry:
- You're at a disadvantage: The lender knows everything, you know little
- Can't verify fairness: You can't audit for discrimination or errors
- Hard to fix errors: If your credit report is wrong, it's difficult to correct
- No transparency: You can't understand why decisions are made
Credit Requires a Relationship
🤝 What This Means
You can't use credit anonymously or without permission. You must establish and maintain a relationship with a financial institution (bank, credit card company, lender) who grants you access to credit.
📋 Requirements to Get Credit
- Application: You must apply and provide personal information
- Approval: The creditor must approve you (they can say no)
- Credit History: You need to build a history of borrowing and repaying
- Ongoing Relationship: You must maintain the account and relationship
- Compliance: You must follow their rules and terms
⚖️ Power Imbalance
The relationship is not equal. The creditor has power over you:
- They can deny you credit
- They can change interest rates
- They can reduce credit limits
- They can close your account
- They can report negative information to credit bureaus
- You're dependent on their approval
🔐 Privacy Trade-off
To get credit, you must give up privacy:
- Share personal information (SSN, income, employment)
- Allow credit checks and monitoring
- Give access to your financial data
- Accept ongoing surveillance of your credit behavior
Types of Credit
Credit Cards
Revolving credit that allows you to borrow up to a limit and pay back over time
Loans
Borrow a fixed amount and repay it in installments with interest
Mortgages
Long-term loans secured by real estate property
Lines of Credit
Pre-approved credit limit you can borrow from as needed
Credit vs Cash
A promise to pay later (liability)
Actual money you own (asset)
Closed source - proprietary systems
Open - you can verify and count it
Yes - must establish with creditor
No - you own it directly
Interest and fees (costs money)
No cost (you already own it)
Creditor controls terms and access
You have full control
Requires sharing personal information
Can be used anonymously
Can't verify credit score calculations
You can count and verify it yourself
Decreases net worth (liability)
Increases net worth (asset)
Key Concepts
What is Credit?
Credit is the ability to borrow money or access goods/services with the promise to pay later.
Credit is a Liability
When you use credit, you create a liability - you owe money to someone else.
Credit is Closed Source
Credit systems are proprietary and opaque - you can't see how decisions are made or verify the system yourself.
Credit Requires a Relationship
To get credit, you must establish and maintain a relationship with a financial institution or creditor.
Credit Scores
Your creditworthiness is measured by proprietary credit scores that you can't fully understand or verify.
The Cost of Credit
Credit costs money through interest, fees, and the opportunity cost of debt.
Key Takeaways
💸 Credit is a Liability
Credit represents money you owe, not money you own. It decreases your net worth and makes you poorer.
🔒 Credit is Closed Source
Credit systems are proprietary and opaque. You can't see how scores are calculated or verify fairness.
🤝 Credit Requires a Relationship
You must establish and maintain relationships with creditors, sharing personal information and giving them power over your financial life.
💰 Credit Costs Money
Credit charges interest and fees, making it expensive. The longer you carry debt, the more you pay.
⚖️ Power Imbalance
The creditor has power over you - they can deny access, change terms, or close accounts. You're dependent on their approval.
📊 Net Worth Impact
Every dollar of credit debt decreases your net worth. Credit doesn't make you rich - it makes you indebted.