Believe it or not, there are multiple ways for your credit score to be calculated. This goes beyond how the credit reporting agencies compile data for your credit file, mind you. It’s about different programs that use different standards in order to come up with a figure for your credit score.
One of the more popular standards out there is the one used by FICO and nearly every credit reporting agency uses it to generate your score. This does beg the question: Is FICO used at all in the UK?
The answer to that might require a bit of an explanation..
The FICO score is a standard that was created by the Fair Isaac Company or FICO. Operating in the US since 1989, FICO is a company that specialises in what is called as “Predictive Analytics”. In other words, they are quite good at telling us what is most likely going to happen to a person based on the numerical data they have on him.
Apply this to credit transactions and FICO has made a name for itself to be one of the more reliable analytical systems. In helping agencies predict your future credit performance in the future. Their system can tell if a person poses a high risk to any creditor or not given their financial data.
In fact, the three credit reporting agencies in the US which are comprised of Equifax, Experian, and TransUnion, all use FICO in computing the scores for credit holders. However, FICO itself is not a credit reporting agency.
Of course, FICO is not the only grading system used out there. Other credit reporting agencies around the world use VantageScore which has some key differences in their computations. Also, as far as the UK is concerned, they have their own grading systems respectively which will be discussed later on.
Just like any credit score, the FICO score is made up of several components.
Taking up the biggest space at 35%, your payment history covers every entry made in your list of payments. This includes the payments for charges you have made on your credit card and even for monthly services and obligations like gym memberships, utility bills, and subscription to magazines.
This area simply lists down all the payments you have yet to make for each creditor you owe money to. It comprises 30% of your FICO score but has an inverse effect. If you have fewer entries in this section, you tend to get a better score.
Also, delinquent entries put in this section do not last long for 7 years or other similar time periods mandated by the laws of the county. This means that any derogatory remark made on your file on this section will affect you for no more than a decade. However, that doesn’t mean that you won’t have to pay your debts.
In this section, you get a summary of your timeline as a credit holder. It begins with the opening of your first (or oldest) credit card and continues from that point. It takes up a mere 15% of your entire score but long credit histories often result in better FICO scores.
Making up 10% of your score, this section records every search made into your credit information. It usually occurs when you apply for a new type of credit but there are instances when hard enquiries may be made for other instances like when you apply for a new job or rent a flat.
Like the debts section, this aspect has an inverse effect on your score. If there are fewer hard searches made on your credit information for a certain period of time, your FICO score would not be negatively impacted.
Taking up the last 10% of your score, this aspect will rate your account on its credit diversity as well as the number of accounts you have. Having multiple accounts (with little to no derogatory remarks) and getting approved for various types of credit and loans tends to make your score better in this section.
However, another thing to consider here is the frequency of your applications. Opening for more accounts and frequently applying for new types of credit can be an indication that you are a risky credit holder, lowering your score.
Although FICO gathers up a lot of personal data about you to compute your score, there are some types of information that it won’t use. For instance, any personal information that has nothing to do with your credit activities like your gender, race, national origin, civil/marital status, and creed won’t be factored into your score.
There are also some finance-related information that FICO won’t use such as:
The truth is that FICO is not just relegated to one credit score model. There are dozens of FICO systems out there designed specifically for one type of application. For instance, if you are applying for a car loan, there is a FICO grading system out there that generates scores based on your history of making car loan payments. Also, FICO can offer customised grading systems for clients dealing with specific niches in the market.
Lastly, FICO tends to update their general grading formula from time to time. The most recent iteration was at 2014 with FICO 9. Changes in the algorithm have affected the way some factors affect your score like paid collections.
A surprising fact is that many credit holders don’t qualify for a FICO score. To generate a score under this system, there must be a considerable amount of information about you readily available.
For example, to qualify for FICO, you must have at least one credit account that has been open for more than 6 months. Conversely, you can also qualify if at least one of your credit accounts has a credit file in any of the credit reporting agencies for the last 6 months.
The highest range that FICO has is at 750-850 points. if your score lands at this range, there are certain perks available to you such as easy to immediate approval of all your credit applications and the ability to request a reduction for the interest rates for each of your card.
However, what many people do not know is that getting a perfect FICO score of 850 is not actually impossible. In fact, 0.5% of credit holders in all agencies that use the FICO system have reached that score. All it takes is to display sound financial management skills and develop good credit behavior.
Some of the credit behaviors that FICO thinks is exceptional is clearing your balances on a monthly basis and limiting your number of active accounts.
Although FICO is generally regarded as a reliable grading system, it is far from perfect. In fact, there are several issues raised in its algorithms which include:
Since a major portion of the score is comprised of your payments and the debts you owe, a lot of credit holders found that the FICO score can be exploited. They do this by increasing the credit limits to their cards. Since a credit limit dictates the percentage of your credit utilisation rate, an increase in the limit decreases the ratio which, in turn, gives you a better score.
Some lending institutions have opted to not fully trust a FICO score for a variety of reasons. One of these is that FICO does not really predict whether a person will have a good financial performance in the future.
This problem can be traced back to its formula as its credit variety and number of active accounts take up a considerable portion of the score. This means that individuals who have fewer credit card accounts and loan applications might be given an inaccurate score.
Although FICO scores tend to provide employers with a good indicator whether that person is reliable enough as far as their personal finances are concerned, it may not be applicable in some areas. For instance, a good credit history does not really tell whether that person is likely to commit fraud on the workplace.
After all, there have been instances when applicants with good credit scores have performed poorly at work or, worse, committed several violations especially ones that involve the handling of money. Some countries have even passed up laws that mandate that credit scores may only be used against a person if they apply for a certain positions.
The truth is that none of the major credit reporting agencies in the UK directly use the FICO system when coming up with their own credit reports. This is despite the fact that almost all of their counterparts across the world use it.
As of now, the UK branches of Callcredit, TransUnion, and Experian calculate their scores through their own grading systems which are:
Used exclusively by Callcredit, this grading system is based on a database compiled of a person that depicts their payment performance, debt management, and other public data that the agency can gather from creditors.
Compared to other grading systems, Callscore bears the most resemblance to FICO since they share the same grade range. It also helps that it was developed by the same people that set up FICO in the first place.
Used by Experian, Delphi works somewhat similar to FICO in the sense that it predicts the risks a creditor might make when approving a business’s loan. It differs from FICO, however, on the data that it uses to come up with its score which will include:
It also greatly differs from FICO in the sense that Delphi is exclusively used for businesses. Experian has its own credit reporting service for individuals who want to know their most current credit score. This will function similar to the system used by FICO albeit with some changes in the formula here and there.
This is the system used by Equifax and takes some inspiration from FICO’s grading system. It is still used today although you will not have heard much of it. Equifax’s credit grading system is often used internally. This means that creditors using Equifax’s score tend to cross-reference it with other reports to make more informed decisions.
Since FICO is not used primarily by the major credit reporting agencies in the UK, it implies that there is no uniform credit scoring standard used in the country as of recently. In turn, this means that you can get totally different scores from one agency to another.
It also does not help that each agency has their own scoring range. For instance, the perfect score at Experian is 999 while Callcredit’s and Equifax’s are at 700 and 710 respectively. So, even if they were to use roughly the same information for computing your credit score, each agency is going to give you a different score.
Does this mean that there is a chance that you will be regarded as a low-risk person in one agency and high-risk at others? Not really. Although variations in the gradation will be inevitable, there is still some sense of proximity when your scores are going to be computed.
What that means is even if you have different scores from the different agencies, all of them will mostly be saying the same thing to creditors. If Experian’s score implies that you are a safe investment for creditors, the same is true when those creditors read Callcredit’s and Equifax’s report on you.
On the other side, this means that creditors and employers are going to do a lot of cross-referencing in the UK just to know if you qualify for an application. The grading systems used by the agencies, by virtue of them being different from one another, means that neither is going to be as comprehensive as creditors would want them to be.
So, for instance, a company might pull up your report from Experian for data in one section but would look at what Experian and Callscore has gathered as well. This might mean that your application in the UK might take a bit longer to get approved compared to other countries.
The upside to this is that the chances of the creditor making an error in approving your application will be small. Since they are drawing from multiple sources with multiple perspectives on the same information, that creditor has a better grasp on the facts and can determine whether or not you qualify for that loan you are applying.
For your part, this could also mean that the effects of erroneous entries in one report can be lessened through cross-referencing. For instance, Equifax’s report might mark a past debt you had as unpaid while other agencies might mark it as paid. Since it looks like the former’s report is the odd one out, that creditor has at least the option to disregard that remark entirely.
This does not mean that you should get complacent and let these errors slip by. Whenever you feel that there is something wrong in the report given to you by the agency, you have the right to dispute it and request for a correction.
So is the FICO score used in the UK? Not Really. Should this be regarded as a detriment on your part? The answer is the same.
What you have to understand is that FICO, although being the more popular grading system out there, is still just one out of many that credit agencies will use to come up with your score. It has its advantages but it also has its downsides.
In essence, relying too much on one credit scoring system will yield the same effects as getting all of your news from one source: you are never going to get the full picture. If possible, make it a habit to draw from multiple sources to get a good idea as to what creditor reporting agencies and creditors really think about you.
What other grading systems do you think can be used in the UK? Are there other issues you might think that a FICO score might have? Let us know in the discussions down below.