Maybe you saw an article posted on social media earlier this summer claiming that credit scores only exist in the United States. One of these tweets garnered thousands upon thousands of retweets, likes and responses from users lamenting the complexity of the US credit system.
Considering how confusing our country’s financial systems can be, it’s easy to believe the above statement. And it is a misconception that has been repeated on Twitter again and again.
But the truth is, credit scores aren’t just an American puzzle. Several other countries have established credit rating systems, some of which closely mirror that of the United States.
Read on to take a closer look at how our credit scores compare to those of other countries.
A Brief History of Credit Ratings in the United States
Before the 1950s, credit scores did not exist. If you wanted to borrow money, you would go to your local bank and talk to a loan officer. It was in the personal judgment of that officer to determine whether a person was qualified to take out a loan.
There were a few glaring flaws with this process. On the one hand, it was not the most accurate way to determine whether a person would pay off their debts. Then there was the issue of discrimination – it was easy to turn down applicants based on their race or gender when the decision depended on the preference of a single banker.
In 1956, engineer Bill Fair and mathematician Earl Isaac founded Fair, Isaac and Company (now known as FICO) and developed the first credit scoring system based on data rather than personal biases or assumptions. Then, in 1970, the Fair Credit Reporting Act was passed to regulate how credit reporting agencies could collect, access, use, and share consumer credit information.
However, he it was only in 1989 that the modern FICO credit score was created. Today, FICO scores are used by around 90% of major lenders and creditors to determine an applicant’s creditworthiness.
The exact algorithm that determines FICO credit scores is proprietary, although we know the basics of how they are calculated:
- Payment history (35%)
- Amounts due (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit composition (10%)
FICO scores range from 300 to 850, with scores above 800 considered “outstanding”. The higher your credit score, the more likely you are to be approved for loans and lines of credit. You also benefit from the lowest interest rates available. Conversely, a low score makes it difficult to borrow money at low cost.
But what you might not realize is that you actually have a lot of credit scores. There are several different scoring models, and you may have different scores under each one depending on who is reporting the information and how it is used.
For example, FICO provides scores for each of the major credit bureaus – Experian, Equifax, and TransUnion which are based on information that each bureau independently collects and reports. The last iteration is the FICO score 10, but many lenders still review past models or specialized scores such as the FICO Auto Score or the Bankcard Score.
VantageScore launched in 2006 as a competitor to FICO and uses similar rating factors and ranges. Although VantageScores are not used as much as FICO scores, a recent analysis found that 2,800 organizations used nearly 10.5 billion of their scores from July 2017 to June 2018. VantageScores are also likely to be the scores you see when you use free credit rating sites like Credit Karma.
How does the credit rating of the United States compare to other countries
How credit works depends on the country. Some places, including France and India, do not have an official credit rating system. “Instead, in these countries, individual financial institutions assess a borrower based on factors such as income and current assets,” said James Garvey, CEO and co-founder of the financial technology-focused company. credit. Self.
Garvey noted that Canada and the UK, on the other hand, share similar credit bureaus and reporting guidelines as the US, although there are a few key differences.
“Being a registered voter actually increases your UK credit score”
For example, Equifax, Experian and TransUnion also exist in the UK, where TransUnion acquired an existing company known as Callcredit, according to Mason Miranda, a credit industry specialist with Credit card insider. Companies analyze similar factors, including payment history, amounts owed, and how often you apply for credit, to produce scores. However, Miranda noted that the UK credit score ranges are all different. Experiential, for example, uses a range of 0 to 999, with scores of 881 to 960 considered “good.”
Lenders and credit bureaus across the pond also verify your identity using voter registration, which plays a role in credit. In fact, being a registered voter Really Boosts Your UK Credit Score “In the US, there is no benefit to your credit from registering to vote,” Garvey said.
Our neighbors to the north also follow an almost identical credit scoring system. Miranda noted that Equifax of Canada and TransUnion Canada are the two offices used to determine the scores. They too assess similar factors such as payment history, amounts owed and the length of your credit history to determine your score.
The biggest difference between US and Canadian credit scores is the range: In Canada, credit scores vary between 300 and 900, with scores above 760 considered “excellent.”
Credit scoring is quite different in some other countries. In Japan, for example, there is no official credit scoring system, and lending decisions are made between you and the bank, depending on Business intern. Factors such as how long you have been employed and how much you earn are heavily taken into account.
In the Netherlands, you are generally considered to be creditworthy, unless you have encountered problems in the past. Unpaid debts are registered with the Krediet Registratie Office and remain on your file for five years after the debt has been extinguished.
Are America’s Credit Ratings Fair?
Credit scores have been developed to fairly and accurately assess a borrower’s ability to borrow and repay. And unlike some countries that only pay attention to negative ratings, the United States also gives you credit for doing the right things, like paying bills on time.
But the system is far from flawless.
The fact that many countries rely on the same credit reporting bureaus makes it easy to assume that credit scores work the same all over the world. In practice, however, this may not be the case. In particular, the focus on credit and debt products in the United States really highlights how differently they’re applied here, said Michael Broughton, CEO and Founder of Perch credit.
For example, he said, to get a credit card in the United States, a big part of the decision is based on your current FICO score, and second, your cash flow and personal finances.
“In the UK and other countries it’s a bit [the] opposite, ”he said.
Garvey added that a major downside to the US credit system is that if you don’t already have credit, it can be difficult to access, making it difficult to get credit and lender approval. For example, you may earn a high income but never have any debt, so lenders will deny your credit applications due to a lack of credit history or charge you higher interest rates than those who have already borrowed money.
In other words, it is a paid system. And it can force some Americans into needless debt – not just so they can borrow money, but even to rent an apartment or own a cell phone.