Perhaps you saw a social media post from earlier this summer claiming that credit scores only exist in the United States. One such tweet garnered thousands and thousands of retweets, likes and replies from users lamenting the complexities of the U.S. credit system.
Considering how confusing the financial systems in our country can be, it’s easy to believe the above statement. And it’s a misconception that’s been repeated on Twitter over and over.
But the truth is that credit scores are not a uniquely American headache. Several other countries have credit scoring systems in place, some of which closely mirror that of the U.S.
Read on for a closer look at how our credit scores compare to other countries.
A Brief History Of Credit Scores In The United States
Prior to the 1950s, there was no such thing as a credit score. If you wanted to borrow money, you visited your local bank and spoke with a loan officer. It was up to that officer’s personal judgment whether an individual was qualified to take on a loan.
There were a couple of glaring flaws with this process. For one, it wasn’t the most accurate way to determine whether a person would pay back their debts. Then there was the issue of discrimination ― it was easy to deny applicants based on their race or gender when the decision came down to a single banker’s preference.
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 bias or assumptions. Then, in 1970, the Fair Credit Reporting Act was passed to regulate how credit reporting agencies could collect, access, use and share consumers’ credit information.
However, it wasn’t until 1989 that the modern FICO credit score was created. Today, FICO scores are used by about 90% of major lenders and creditors to determine an applicant’s creditworthiness.
The exact algorithm that determines FICO credit scores is proprietary, though we do know the basics of how they’re calculated:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
FICO scores range from 300 to 850, with scores above 800 considered “exceptional.” The higher your credit score, the more likely you are to be approved for loans and lines of credit. You also qualify for the lowest interest rates available. Conversely, a low score makes it tough to borrow money at a low cost.
But what you may not realize is that you actually have many credit scores. There are several different scoring models, and you can have different scores under each one depending on who’s reporting the information and what it’s being used for.
For example, FICO provides scores for each of the major credit bureaus ― Experian, Equifax and TransUnion ― which are based on the information that each bureau independently collects and reports. The latest iteration is the FICO Score 10, but many lenders still look at past models or specialized scores such as the FICO Auto Score or Bankcard Score.
VantageScore launched in 2006 as a competitor to FICO and employs similar scoring factors and ranges. Though VantageScores aren’t used nearly as much as FICO scores, recent analysis found that 2,800 organizations did use nearly 10.5 billion of its scores from July 2017 through June 2018. VantageScores are also likely to be the scores you see when you use free credit score sites such as Credit Karma.
How U.S. Credit Scoring Compares To Other Countries
How credit works depends on the country. Some places, including France and India, have no official credit scoring system. “Instead, in these countries, individual financial institutions evaluate a borrower based on factors such as their current income and assets,” said James Garvey, CEO and co-founder of the credit-focused financial technology company Self.
Garvey noted that Canada and the U.K., on the other hand, share credit bureaus and reporting guidelines that are similar to those in the U.S., though there are a few key differences.
“Being a registered voter actually boosts your credit score in the U.K.”
For example, Equifax, Experian and TransUnion also exist in the U.K., where TransUnion acquired an existing company known as Callcredit, according to Mason Miranda, a credit industry specialist with Credit Card Insider. The companies analyze similar factors, including payment history, amounts owed and how often you apply for credit, to produce scores. However, Miranda noted that U.K. credit score ranges are all different. Experian, for instance, uses a range of 0-999, with scores of 881-960 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 actually boosts your credit score in the U.K. “In the U.S., there is no benefit to your credit from registering to vote,” Garvey said.
Our neighbors to the north also follow a nearly identical credit scoring system. Miranda noted that Equifax of Canada and TransUnion Canada are the two bureaus used to determine scores. They also evaluate similar factors such as payment history, amounts owed and the length of your credit history to determine your score.
The biggest difference between U.S. and Canadian credit scores is the range: In Canada, credit scores range between 300 and 900, with scores above 760 considered “excellent.”
Evaluating credit looks quite a bit 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, according to Business Insider. Factors such as how long you’ve been employed and how much you earn are weighted heavily.
In the Netherlands, you’re generally considered creditworthy unless you’ve run into issues in the past. Unpaid debts are registered to the Bureau Krediet Registratie and stay on your record for five years after the debt is discharged.
Are U.S. Credit Scores Fair?
Credit scores were developed to fairly and accurately gauge a borrower’s ability to borrow and pay money back. And unlike some countries that only pay attention to negative marks, the U.S. 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 way around the world. In practice, however, that may not be the case. In particular, the focus on credit products and debt in the U.S. really highlights how differently they’re applied here, said Michael Broughton, CEO and founder of Perch Credit.
For example, he said, in order to get a credit card in the U.S., much of the decision is based on your current FICO score, and secondly, your cash flow and personal finances.
“In the U.K. and other counties, this is somewhat [the] opposite,” he said.
Garvey added that a major disadvantage to the U.S. credit system is that if you don’t already have credit, it can be tough to access, making it hard to build credit and gain approval from lenders. For example, you may earn a high income but have never taken on any debt, so lenders deny your credit applications based on a lack of credit history or charge you higher interest rates than someone who has a history of borrowing money.
In other words, it’s a pay-to-play system. And that may force some Americans to take on unnecessary debt ― not only so they can borrow money, but even rent an apartment or own a cell phone.