How are credit ratings arranged in countries with the world’s strongest economy, what are their differences and similarities
Credit scoring (a credit score) – a system for assessing the creditworthiness of a consumer of financial services. this Affects For any application that is submitted to obtain various types of loans: from loans to purchase goods, from real estate to credit cards. If a low credit rating in Ukraine affects the likelihood of getting the next loan, in other countries, such as the UK, consumers with poor credit histories may also be denied housing rentals. How are credit ratings arranged in countries with the world’s strongest economy, what are their differences and similarities – read further in the article Payspace magazine.
Credit rating in the US and UK: What are the differences and similarities
Although credit scoring systems are very similar in the UK and the United States, they have several important differences, the financial company notes. Self finance. This is partly due to the effect of various data protection laws and what information the credit bureaus have access to.
A good credit rating gives access to higher credit card limits, lower mortgage rates and other types of loans, which will likely save a large amount of money. Poor rating – to refinance into a lender
How is the debtor identified?
In the UK, lenders and credit bureaus make their identification using voter list information. Such a register contains personal information about all citizens registered to vote in elections. It includes name, address, date of birth and ballot number and is used to determine which constituency the citizen is in and where to send the ballot.
In the United States, instead of voter list data, a Social Security Number (SSN) is used – a nine-digit code assigned to US citizens and residents. The SSN is a unique identifier often required for employment, for opening accounts in banks and issuing loans, renting apartments, as well as medical services.
Credit bureaus in the United States and Great Britain
The main offices in the United Kingdom and the United States are Experian, Equixax, and Transunion. Despite the fact that these are similar companies, they do not share data on the borrower’s credit history with each other.
In both countries, the credit bureau collects information about credit history and credit behavior as well as personal information about the borrower. However, the similarity ends here. Bureaucrats negotiate with lenders and provide them with information in the US and UK. In particular, the biggest difference concerns credit scoring – how it is calculated and used.
How does credit scoring work in the UK?
In the UK, lenders often have their own credit ratings based on their own criteria and calculations, and credit bureaus do not use ratings. Furthermore, it is through the scoring of credit bureaus that consumers can find out about their ratings.
pay attention. In February 2020, British Nobank Monzo and Royal Bank of Scotland (RBS) announced that their customers would now be able to verify the approval of a loan application by tracking the credit rating for free through a mobile banking application. To assess credit, banks use data from the TransUnion Credit Agency.
Experian clearIn the UK, each credit bureau can compile a rating using different information about the borrower and evaluate it separately. So, some data can be evaluated positively in one company, and negatively in another. Because of this, credit ratings may vary depending on the bureau.
“A universal credit rating does not exist, as results from different sources are calculated using different sources and criteria. For example, they will also be evaluated on different scales, from 1 to 700 or from 1 to 1000. This is why you can get 500 on one scale and 700 on the other, even if the information provided is the same, ”explains Equifax.
Apart from different methods for calculating ratings, some British agencies, such as TransUnion, differentiate between the concepts of credit rating (credit rating) and credit scoring (credit score). Also, most credit bureaus Use These words are like synonyms.
The UK TransUnion Credit Rating System shows the type of credit risk that a borrower can present to lenders based on the following factors:
- total debt
- Payment History (including late payment)
- credit history
- Bankruptcy and bankruptcy
- Voter list borrower information
- Borrower financial partner
The Equifax UK Credit Bureau also considers the following information:
- Credit report
- Credit Account Payment History
- Strict inquiry – when and how often the consumer applies for a loan (displayed in the credit history)
- Public records (voter list and district court decisions)
What is a credit rating in the United States?
In the USA, several types of credit scoring are used (including different versions of FICO and VantageScore scores), while all major systems use a scale of 300 to 850 points. To decide on lending, one of the credit bureaus is usually used. The most popular model is FICO – it is used by about 90% of US lenders.
According to loan expert Barry Papperno, annually, based on FICO scoring, lenders make about one billion loan decisions.
The timeliness and completeness of utilities and rent payments are taken into account when calculating credit ratings in the UK. This information works bilaterally – if you have a bad credit history, the consumer may be denied rental accommodation, even if it provides a certificate of employment and solvency. James, 32, a resident of Bristol, told Pespace magazine that due to a poor credit history, local landlords can only rent housing if they pay for six months in advance.
In the United States, these figures are usually not taken into account. Scoring is mainly calculated keeping in mind five factors:
- Payment History
- New loan applications and records in credit history of loans and applications issued (strict inquiries)
- credit history
- Types of loans used
In addition, credit bureaus in the United States cannot take into account information about the use of bonded lending products – an extremely high interest rate, a loan using self financial notes.
Lying Sucks: Attitude to Older Credit Cards in the United States and Britain
In the UK, the credit bureau separately assesses the availability of old credit accounts. Equifax (UK) and TransUnion (UK) recommend to close all unused credit cards, and Experian (UK) urges you to keep the card without debt, as it has a positive impact on scoring.
In the United States, regardless of the valuation model or bureau, experts agree that the borrower should keep old accounts open, as long as the average credit history is 15% of the FICO credit rating.
The presence of a higher credit limit is considered a positive factor than the amount of debt used in the United States, whereas a larger limit is considered negatively in the UK.
Credit rating does not include income and savings
Experian (UK) in its Consumer Guide makes it clear that the agency does not take into account income, savings, job availability and taxes when calculating ratings, as this information is not included in the credit history. However, lenders can ask in the form of explicit questions and then use consumer responses to make a final decision on lending.
The same goes for credit scoring in the USA. Although it has no effect on credit history, the general rule in the United States is to maintain a debt to income ratio below 30%. Otherwise, lenders may assume that the borrower has too many loans to pay back the loan on time.
Hard and soft: the effect of the number of requests on credit history
In the United States and Great Britain, request for credit history of a borrower applying for a loan equally affects the rating. Present Two types This type of inquiry is hard questioning and soft questioning.
- Soft inquiry – Credit history verification as part of data verification, which is not displayed in the credit history. For example, a credit card issuer checks without the borrower’s permission to find out if he is entitled to certain credit card offers. Credit Karma is also a soft inquiry when checking credit scoring and obtaining a job certificate.
- Strict inquiry – Checking the credit history by a lender or credit card issuer to decide on a loan when applying for a mortgage, home loan or credit card. Displayed in credit history.
In the United States, the number of times a consumer fills his credit term is 10% of his FICO credit rating. With each new stringent inquiry, the credit rating decreases by at least a few points.
At the same time, in both countries, the consumer must give his or her consent, before the company can conduct a thorough investigation of its credit history.
Financial partner and financial guarantor
In the UK, a financial partner refers to a person with whom a consumer has a common bank or credit account, whether it is a spouse, a partner, a friend or a relative.
According to Experian (UK), a financial partner’s credit history does not affect a consumer’s credit history, but lenders can see it when the borrower applies for a new or an older loan extension. This is due to the fact that the financial position of the financial partner can affect the borrower’s ability to pay back the loan on time.
“Lenders can take into account the financial behavior of the financial partner, even if you apply for a new loan yourself. If your partner’s credit history is poor, it may affect your ability to get a new loan contract, ”Equifax (UK) reports.
In the United States, a co-borrower is one with whom you are signing a loan agreement: for the purchase of a car, real estate, and more. In this case, in order to issue or increase the loan, the lender will take into account only your general credit accounts, not the overall financial behavior of the co-borrowers.
Paypal magazine help
A credit rating is a way of assessing whether a person is trying to borrow money from a bank or other financial institution. Traditionally, financial institutions assessed their customers’ current credit history, income level, and the presence of consumer loans based on their own files about the credit bureau or borrower. However, these data are not sufficient today. Therefore, lenders are using alternative sources of solvency evaluation based on the Big Data trend: the accumulation and proper use of large amounts of information can help you learn more about a potential borrower than your bank account. How Technology Is Changing Modern Lending – Read the link in PaySpace magazine.
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