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Sunday, August 18, 2013

I am a deadbeat

I think of a “deadbeat” as someone who doesn’t pay their debts on time.  But it turns out that in the interesting world of banking, a “deadbeat” is someone who DOES pay their debts on time:

borrowers reported owing only about 50 cents for each dollar claimed by credit card lenders.


There are plausible explanations for part of the difference. In particular, people who pay the full balance on their cards each month – lenders call such customers “convenience users” or, more colorfully, “deadbeats,” because they do not pay interest and therefore are less profitable — may not regard that balance as “true” debt, and therefore choose not to report it. The industry, however, simply reports the total volume of outstanding loans. (Lenders, after all, have no way to know which loans will be repaid at the end of the month and which loans will stay on the books.)

This is from http://economix.blogs.nytimes.com/2011/10/20/how-much-do-you-owe-guess-again/ with emphasis added.

Another interesting thing: no way to know?

There’s another interesting thing about the quote above. Note the claim that there is “no way to know which loans will be repaid at the end of the month”.  Really? Are there no statisticians at banks?  This would seem to be a relatively simple forecasting problem at the aggregate level, especially since the credit scores are basically an estimate of the likelihood of payment, and most consumers have many months history to allow an estimate as to the probability they will pay off their balance.