Credit Scores: A Tale of Two Systems , US vs UK !!!

So you're looking to move abroad, are you? Whether you're planning to relocate for a job, love, or just a change of scenery, there are some key things you need to consider. And if you're moving from the UK to America or vice versa, one of the most important things to understand is how credit works differently in each country.

Credit scoring in the US and UK appear quite similar on the surface. But dig deeper and you'll discover some major differences in how scores are calculated, what impacts them, and how they're used. So before you pack your bags, learn how credit scores differ in the UK vs the USA. Doing your research now could save you a lot of headache later as you try to rent a flat, buy a car, or open a bank account in your new home. The tale of two credit scoring systems awaits you. How the story ends depends entirely on how well you understand the key differences we'll explore.

The Basics: How Credit Scores Work in the UK and US...

If you’ve ever wondered why your credit score looks so different in the UK versus the US, it comes down to two very different scoring systems.

In the UK, credit scores are calculated based on information from Experian, Equifax and TransUnion, the three major credit bureaus. The most well-known scores are Experian’s Credit Score and Equifax’s Credit Report and Score. These scores range from 0 to 999, with higher scores indicating a good repayment history and creditworthiness.

Across the pond, the FICO Score is king. Calculated by Fair Isaac Corporation based on info from Equifax, Experian and TransUnion, FICO Scores range from 300 to 850. FICO Scores consider the same factors as UK scores like payment history, amounts owed, length of credit, new credit and credit mix.

A few key differences:

UK scores place more emphasis on current financial stability, while FICO considers credit history trends.

FICO scores deduct more points for missed or late payments. Delinquencies severely hurt your US score.

“Credit mix” factors more heavily in the US, so having experience with both revolving (credit cards) and installment (mortgages, auto loans) credit is important. UK scores focus primarily on repayment ability.

While the systems differ, improving and monitoring your score according to your country’s criteria is vital to your financial well-being. Understanding these differences will help you navigate each system and work to raise your scores, no matter which side of the Atlantic you call home.

Major Credit Bureaus: Experian vs Equifax vs TransUnion...

In the US, there are three major credit bureaus that track your credit history and calculate your scores: Experian, Equifax, and TransUnion. While they all provide the same basic service, there are some key differences to be aware of.

Experian is the largest bureau, with credit files on over 200 million Americans. They are also commonly used by lenders to check credit for major financial decisions like mortgages. Equifax is nearly as large, with data on over 150 million people. TransUnion rounds out the top three, with information on about 200 million consumers.

Experian and Equifax both use the FICO scoring model, while TransUnion uses the Vantage Score model. So scores from TransUnion may differ slightly from the other two.

The bureaus don’t share data with each other, so the information in your Experian report may vary from what’s in your Equifax and TransUnion reports. It’s a good idea to check all three.

You can obtain free annual credit reports from each bureau but for your actual scores, you’ll likely have to pay a fee. Scores from one bureau may differ from another, so check with each one.

When applying for credit, lenders will commonly pull your report and score from one or more of the bureaus to review your creditworthiness. So make sure there are no errors or signs of fraud on any of your reports or scores. Monitoring all three credit bureaus gives you the full picture of your credit health.

Scoring Models: FICO Scores vs Vantage Score...

FICO Scores.

 The Popular credit scoring model in the US is the FICO Score. Created by the Fair Isaac Corporation, FICO Scores range from 300 to 850, with higher scores indicating a lower risk to lenders. The scores are calculated based on the information in your credit reports, including:

• Payment history (35% of score): Do you pay bills on time? Late or missed payments severely hurt your score.

• Credit utilization (30% of score): How much of your available credit do you use? High balances relative to your limits negatively impact your score.

• Credit history length (15% of score): Have you established a long credit history? Short or "thin" files make you a riskier borrower.

• New credit (10% of score): Have you recently opened a lot of new accounts quickly? This could indicate risky behavior to lenders.

• Credit mix (10% of score): Do you have a mix of accounts like revolving credit cards and installment loans? A good mix is better for your score.

FICO Scores are used by over 90% of U.S. lenders to determine eligibility and interest rates for mortgages, auto loans, credit cards, and other financial products. The higher your score, the more likely you are to qualify and receive a lower interest rate.

Vantage Score.

Vantage Score is accepted by some major lenders but not as widely as FICO. The model aims to provide scores for those with little or no credit history, as well as second-chance scoring for those recovering from financial difficulties. Whichever model is used, the higher your score the better. Check your latest scores and reports regularly to ensure there are no errors holding you back.

What Impacts Your Credit Score: The Differences That Matter...

The factors that determine your credit score differ quite a bit between the US and UK systems. While the basics are the same—pay your bills on time and don't max out your cards—the specifics can impact your score in different ways.

Payment History

This makes up a whopping 35% of your FICO score in the US, but only accounts for 30% of your UK score. Late or missed payments severely hurt your US score, while the UK system is a bit more forgiving of occasional slip-ups if you have an otherwise good payment record.

Credit Utilization

How much of your available credit you're using, also known as your credit utilization ratio, is 30% of your FICO score. In the UK, it's only 25% of your score. Maxing out cards can do major damage to your US score, so keep balances low relative to limits. The UK system allows higher balances without as much of an impact.

Length of Credit History

The longer your credit history, the better for your US FICO score. It makes up 15% of your score. In the UK, your credit age only accounts for 10% of your score, so while still important, a shorter credit history won't hurt you as much.

New Credit

Applying for too many new credit accounts too quickly can lower your score in both systems. However, new credit applications make up only 10% of your FICO score but 15% of your UK score. So go easy on the new card applications, especially if you have a short or limited credit history.

Credit Mix

Having a good mix of credit accounts like installment loans, finance company accounts, credit cards, and mortgages in your credit history can help your FICO score. It makes up 10% of your score. In the UK system, your credit mix has no bearing on your score. The type of accounts you have doesn't matter.

While the factors that determine your scores are largely similar, understanding the differences can help you build and maintain the best score possible in each system. Pay attention to the details, and you'll be seeing top scores on both sides of the pond.

Build and improve your credit score...

Building and improving your credit score takes time and patience, but by following some key steps, you can get there.

Check your credit report regularly.

The first step is knowing your credit baseline. Request a free credit report each year and check for any errors. Dispute them with the credit bureaus to get them corrected promptly. The higher your score, the more impact errors can have.

Pay bills on time

Pay all bills on time each month, whether it's rent, utilities, credit cards, or other loans. Late or missed payments severely hurt your score. If needed, set up automatic payments or payment reminders to avoid slips.

Keep low credit card balances

High balances hurt your score the most, even if you pay on time. Aim for less than 30% of your limit whenever possible. Pay off the entire balance each month if you can.

Limit new applications

Apply for new credit only when needed. Each application can lower your score a few points. Space out applications by at least 6-12 months when possible. The impact lessens over time as long as other factors remain the same.

You may want to increase your credit limits

If you keep low balances relative to high limits, it helps your score. You can request higher limits from your credit card companies, especially if you have a good payment history with them. Make it clear you do not intend to increase spending, only want to improve your credit utilization ratio.

Alternative credit data

For those with little or no traditional credit history, alternative data like rent payments, utility bills, phone bills and insurance payments can help build your credit score over time. Some credit scoring companies use this data, so check with them to see if you can benefit from this option. Every little bit helps when building credit from scratch!

Following these tips consistently over time is key to improving your credit score in a responsible way. Stay patient and keep working at it—a good credit score is a marathon, not a sprint!

Conclusion

So there you have it, a tale of two credit scoring systems on opposite sides of the pond. At the end of the day, no scoring model is perfect, but being aware of the differences between the UK and US systems can help you better understand your own credit and make more informed decisions. Your credit score has a significant impact on your financial life, so do what you can to build good credit habits and check your reports regularly, no matter which system you're under. Staying on top of your credit and using it responsibly is the best way to achieve your goals, whether that's buying a home, taking a dream vacation, or starting that new business venture you've been planning. Use your credit score to your advantage and open up more opportunities. 

The more you know, the more power you have - and knowledge is power.