In America, your credit score along with your credit report can make or break your ability to secure loans, apply for credit cards or find a decent place to live. The emphasis that our banking system puts on the almighty 3 digit number got us thinking: How is credit worthiness calculated in different parts of the world? From India to Sweden, each country’s lending system (banks etc.) has its own method by which it assesses its users. If you’re at all curious about how credit reporting works in various countries around the world, read on!
Credit Reporting in China: For a country with a booming economy and a GDP that is second only to USA, you may find it a bit surprising to know that Chinese banks don’t actually have national credit beureaus; nor do they have a sophisticated method of calculating your credit-worthiness. Rather, each application for a loan from a bank, be it a credit card loan or a mortgage, is examined manually and each application is verified on a case by case basis. Given that there are more than 100 million credit cards circulating in the Chinese economy, that’s a whole lotta applications to read through! While American credit card companies started going after subprime borrowers in the mid 2000s, China has yet to exhaust the needs of even the prime credit card market. But borrowers beware — Delinquencies on your loans are not tolerated very well in China. Under Chinese law, if you default on your credit card on a sum as little as $3000, you may end up facing up to five years of jail time! No wonder the Chinese mostly borrow within their means and more than 70% pay off their balance every month.1
Credit Reporting in India: Unlike China, India does have a centralized credit agency called the Credit Information Beureau India Limited (CIBIL). In 2009, CIBIL launched a score for personal loans, similar to the American credit score, which helps predict the likelihood of defaulting on a personal loan over a period of 12 months.2 The score ranges between 300-900 and works very similarly as the American credit rating system. A score higher than 800 means your credit history is excellent while a score closer to 300 does not bode very well for you. Those with no credit history must build one in order to obtain a score. An individuals credit history is compiled and can be accessed in the form of a Credit Information Report (CIR), which is the Indian equivalent of a Credit Report. Similar to credit scores in the US, payment history, use of credit, length of credit history, hard credit inquiries and diversification in credit are all factors that impact one’s CIR. Your credit report reflects a credit history over a three-year period and is updated on a regular basis. The score, however, is only calculated if an inquiry is made.3
Credit Reporting in the UK: Here’s another country where creditworthiness is assessed via a combination of a credit report containing information about your debt history as well as a score assigned to you by various credit agencies. Experian, Equifax and Call Credit are the 3 major agencies operating in the UK Credit scores are assigned on a range between 0 and 1000 with a high score representing a ‘good’ score. The average credit score in the UK is 763. The profile of a credit worthy individual in the UK will look very similar to that of one in the US and is calculated predominantly based on one’s ability to repay existing loans without topping off their lines of credit, the length of the credit history, the diversity of loans in their portofolio etc. Too many credit inquiries result in a negative impact on the score while people with a lack of credit history do not get a score assigned to them and may have a difficult time securing substantial loans such as mortgages. One interesting tidbit– being registered to vote at a particular address may help your credit report as lenders check local electoral registers as a way to verify where you live. In addition, having lived in the same address for a number of years is considered as a sign of stability and can impact your score.4
Credit Reporting in Germany: Germany’s credit agency is called the SCHUFA, which is a private orgainization that helps loan givers (i.e banks etc.) assess an individual’s likelihood of loan default. The data that makes up the information in a SCHUFA credit report is provided by banks, credit partners. In addition, the SCHUFA can also collect information from publicly available databases such as criminal records or data available via law courts. For the most part, the information in the SCHUFA comprises of identification information (name, Date of Birth, previous addresses etc. ) a list of positive credit relationships (no default) and a list of negative credit relationships (credit default). The information in the SCHUFA cannot be accessed without the consent of the person who has intent to take on the credit or loan. Unlike the US, positive or ‘good’ credit history is reset and deleted after 3 years of obtaining it while negative data lingers on your record until it is settled. Every time an individual applies for a loan, the SCHUFA calculates and assigns a score between 1-100 with lower numbers indicating a higher risk of defaulting on that loan. Interestingly enough, the score assigned to you will be different based on who is asking for the report (banks, telecommunication company etc.). While an individual can obtain a line-item based SCHUFA report of her credit history, she has no access to the actual score that is assigned to her when she applies for the loan. This practice has received heavy criticism in the past. On the flipside of things, if a person does not have a credit history in Germany, but can prove her employment status, has job security and has sufficient funds, she can obtain a loan or credit card much more easily than she could in the US.5((Source: Dominik Barnichon -Friend and Finance Graduate Student in Germany))
Credit Reporting in Sweden and Austria: Sweden’s system is very interesting as it has only two levels of creditworthiness: Good or Bad. If an individual defaults on a payment even after reminders are given, he/she will have their case forwarded to the Swedish Enforcement Administration. The person’s credit record will gain a blemish which can be stored for 3-5 years, thus making it very difficult for that person to get a loan, rent an apartment etc. In Austria, credit scoring is done as a blacklist. If you pay your bills on time, great! If not, you may endup on a blacklist. The good news for those who end up on the blacklist is that only certain types of companies (such as cellphone service providers) use the blacklist to assess your creditworthiness as the list directly reflects your ability to make payments on bills. If you need a loan from a bank, securities and income serve as primary indicators of your ability to pay a loan.6
So there you have it! You now know a little bit more about personal credit rating systems around the world. This should make for some interesting conversation around the water cooler at work or at a get together at a friend’s house, don’t you think?
- Source: “China Charges Into Credit Cards” LA Times, Oct 2008 – <a href=”http://articles.latimes.com/2008/oct/22/business/fi-chinacredit22” target=”_blank”>http://articles.latimes.com/2008/oct/22/business/fi-chinacredit22</a> [↩]
- Source: “CIBIL launches score for personal loans” Sify Finance May 2009 [↩]
- Source: “CIBIL launches score for personal loans“, Business Standard April 2011 [↩]
- Source: “Your Credit Rating Explained“, BBC News Jan 2008 [↩]
- Source: “SCHUFA” – U.S. Department of Education, May 2011 [↩]
- Source: “Credit Score“, Wikipedia [↩]