How credit scoring varies around the world
Scoring methods, factors can vary greatly from country to country
Apparently, you can't easily translate "FICO" into just any language.
Although dominant in the United States, the three-digit FICO credit score doesn't hold the same status around the globe. Some variation of the score is used in 19 countries outside the United States. However, that still leaves many international lenders looking to local versions of credit scoring models to help judge a borrower's potential risk.
Generally, international credit scoring models differ in two basic ways: the factors they consider and the weights assigned to them. Just what factors do those local scores take into account? Experts say some variables are nearly universally considered -- such as payment history and utilization rate on revolving card products. However, in some cases, the borrower's race, gender or even living situation can also be a factor.
In South Africa, for example, "our interpretation of the regulations is such that if we can show that something is predictive -- and there isn't anything else to replace it -- then it's fair game," says Raymond Anderson, the South Africa-based author of "The Credit Scoring Toolkit."
|Credit scoring factors
around the world
Here are some quirks of credit scoring methods from around the world:
It's a small world -- sort of
In general, experts agree that credit scoring models around the world have much in common. For example, FICO says that its same basic blueprint is always used, though its credit scoring algorithm is adjusted depending on the credit bureau data available in each country. Meanwhile, TransUnion says it attempts to re-apply credit scoring models across countries that share similarities. For example, the credit bureau reapplied its scoring model for India to nearby Thailand.
Nevertheless, not all countries can use the same scorecard. "The products that are being used in the U.S. differ vastly than the products being used in India or Thailand," says Chet Wiermanski, group vice president of global analytics with credit bureau TransUnion, adding that there are an average of three credit accounts per consumer in Thailand, compared to an average of 16 accounts in the United States.
But such differences among nations' scoring models are somewhat routine compared with other -- more surprising -- variables.
Race as a scoring variable
As late as the mid-1990s, many South African credit scores considered the color of potential borrowers' skin. This could either be achieved directly or through postal codes that corresponded to the racially segregated suburbs. The country's scoring models would calculate lower scores for the underserved market of black consumers, due to what experts describe as a shortage of information on those borrowers. Since race was permitted to be reported and regarded to be a good predictor of repayment, lenders used it. In those days, black "people had little access to credit or they didn't have appropriate infrastructure for making repayments," says Anderson.
These scores took race into account "not because a black person is better or worse than the general population -- it has another meaning," Anderson says, adding that race might indicate, for example, that the borrower lived in an area with poor access to banks.
But things have changed with black South Africans gaining greater access to credit and lenders now having more in-depth information about their borrowing history. Race "correlates to financial unsophistication and a lack of credit-related data. As these improve, it falls away," Anderson says. "Generally, in the South African scoring arena, to the best of my knowledge, race has not been used in at least the past 14 years," says John Fourie, executive director of TransUnion analytic and decision devices in South Africa.
"In Africa, in general (excluding South Africa, Namibia and Botswana), the data quality, availability, density, etc., is limited," says Fourie. That, he says, leads to the use of locally developed credit ratings created by a bank or merchant, not by a credit bureau. However, he notes that Africa is changing, as a larger number of sub-Saharan nations regulate credit bureaus. In time, that will lead to increased lending sophistication, Fourie says.
While South African credit scores apparently no longer use race, that doesn't mean it isn't used elsewhere. "Race is considered and may be used in certain countries where it is not banned, but these are the minority," says Monaco-based Graham Platts of GDSLink Inc., which provides a software toolkit to link to all the major U.S. credit bureaus.
"Gender practically comes in as a stock standard, especially in third-world environments," says Anderson, adding that when all other things are equal, women are more responsible borrowers than men. He says that correlation might spring from the traditional female role as nurturers and caregivers. "I think there's a lot of truth in certain gender stereotypes," Anderson says.
Anderson cites the example of Bangladesh-based Grameen bank, which lends exclusively to women. According to the Grameen Bank website, "studies have shown that the overall output of development is greater when loans are given to women instead of men, as women are more likely to use their earnings to improve their living situations and to educate their children."
In South Africa, gender continues to be used as a scoring characteristic, says TransUnion's Fourie. "However, it is only used where it does not breach any of the laws around gender and race," he says in an e-mail. "It may not be the primary reason to decline or unfairly treat a client."
The perils of prohibiting positive data
In many nations, only negative data can be reported to the credit bureaus. However, that can lead to a lack of information on consumers, especially those with no negatives to report. Without any negative (or favorable) historical data, bureaus may be left with only biographical information on borrowers.
Our interpretation of the regulations is such that if we can show that something is predictive -- and there isn't anything else to replace it -- then it's fair game.
|-- Raymond Anderson
Standard Bank Africa
In countries that lack a reliable consumer credit bureau, credit scorecards may consist entirely of 15 to 20 "application form" characteristics -- such as income, employment and length of residence -- that come from the credit application. Experian says that many countries rely entirely on application form characteristics to generate credit scores. "If the credit bureau only provides negative (default) data -- which is common -- then the credit bureau will always be checked, and if an individual is 'clear' then an application form-based scorecard would generally be applied," Simon Harben, head of global bureau analytics for Experian Decision Analytics, says in an e-mail.
Relying solely on negative data can lead to some challenges. TransUnion says that when it first launched in Hong Kong, the country's government barred the use of positive data on consumers from being used in credit scoring. Instead, Hong Kong credit scores were only able to include derogatory information on borrowers.
That lead to the case of a man dubbed "The King of Credit." Over a two-year period, the man opened 72 lines of credit, adding lines with most Hong Kong lenders, including the major banks. Yet he had no late payments, as he used the money from new lines of credit to make the minimum payments on existing accounts. That helped him maintain a favorable credit score, letting him appear to banks to be a responsible borrower.
Finally, after his 72nd line of credit was granted, the King of Credit had his first negative item reported, which finally enabled credit bureaus to see all his accounts. That revelation resulted in an important lesson: "Sharing positive data would have provided creditors with a complete picture of this individual and prevented this situation," according to a presentation from Alex Yuen, managing director with TransUnion, Hong Kong. TransUnion says it has since proven to Hong Kong authorities the value of including positive data in credit reporting.
When it comes to whether the borrower is a homeowner or renter, "an owner is lower risk than a tenant, whether he is in the United States, U.K. or Germany," Platts says. Still, in some countries, that data isn't always considered. Canadian mortgage payments are generally not reported to the credit bureaus as they are in the United States, TransUnion's Wiermanski says.
You can also be dinged for living with mom and dad after a certain age. Platts says remaining under the family roof can hurt the credit score of U.K. residents past the age of 25 -- since the norm is to leave their parents' home by that time -- but that is not true elsewhere in Europe. "In Germany or Southern Europe, for example, it is much more the norm to live with your parents for a long time. And families live together in Greece, for example, for a very long time. Therefore, this is nowhere near so negative," Platts says. But, he added, that information isn't always available. "Living with parents is much harder to deduce from a bureau report. We still have application forms in Europe, and it is one of the tick box answers, which is why we have the info here."
The choice of a spouse can also come into play. "Most countries restrict the use of credit bureau data to the individual applying for credit. This is the case in the United States," Experian's Harben says via e-mail. "But in the U.K., an individual's spouse/partner's data can also be used -- as long as there is an established 'financial association' at the credit bureau."
Race is considered and may be used in certain countries where it is not banned, but these are the minority.
|-- Graham Platts
Other scoring differences
Freedom to report data. Businesses in some nations do not have the option of deciding whether or not to share the information they collect on borrowers. "In some countries, it is compulsory to supply data to the bureau, e.g., Russia, France (for very serious debts), Belgium, and in others, it is voluntary, e.g., U.K., Spain," says Platts in an e-mail.
Payment history. Payment history is weighted differently in the credit scoring models of different countries. "People who miss a payment are higher risk, no matter where they come from," says Platts. However, missed payments are more socially acceptable in some places. "It hurts your credit rating, and hence your cost of credit, in the United States, for example, but in Southern Europe, it is perhaps more the norm with little consequence," Platts says. Experian cites South Africa as another example. In that country, "some 'retailer accounts' could miss three or four payments without being considered seriously delinquent, simply because of the difficulties customers have in traveling to make regular payments," Harben says.
Neighborhood. For borrowers in the United States, FICO says the applicant's exact location is not included in the calculation of his or her credit score. That's not the case abroad. "Geo-demographic data, such as percentage of households in a ZIP code with a default, is also widely used outside the United States," says Harben, via e-mail.
Utility payments. Even within North America, credit scores treat electric and water payments differently. TransUnion explains that in Mexico, public utilities don't report information on their customers to credit bureaus. That isn't the case in the United States, where public utility payment information is shared with credit bureaus. In Europe, Platts says, credit scores rarely include utility payments, since credit bureaus rarely hold this information. South African utility data is not currently submitted to the credit bureau and therefore not used in scoring, Fourie says.
See related: Moving abroad? Your credit history might not follow, Tips for immigrants building a U.S. credit history, Leaving debt behind in another country, Will there ever be one global credit scoring model?
Published: August 7, 2009
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