（Original Video in Japanese was published on the FINOLAB CHANNEL on Dec. 13, 2024）

In modern society, the “credit score,” which quantifies an individual’s creditworthiness, plays a crucial role in financial transactions and daily life. This article provides a detailed overview of the basics of credit scores, their use cases in Japan and abroad, and their future prospects.

What is a Credit Score?

A credit score is a numerical indicator of an individual’s creditworthiness and ability to repay debts. It is used in the following scenarios:

• Loan approvals (e.g., mortgages, car loans)
• Credit card issuance
• Rental agreements (credit checks by guarantee companies)
• Mobile phone contracts (installment payment reviews)

Higher scores indicate greater creditworthiness, while lower scores are seen as a sign of higher risk.

Factors in Calculating a Credit Score

Credit scores are typically calculated based on these elements:

1. Payment history
2. Ratio of credit usage to credit limits
3. Length of credit history
4. New credit accounts
5. Types of credit

Credit bureaus use these factors to calculate scores using proprietary criteria.

The Credit Score System in the United States

The U.S. is considered a leader in credit scoring, with centralized data management by credit bureaus such as Experian, Equifax, and TransUnion. A prominent metric is the FICO score, which typically ranges from 300 to 850 points.

Key components of a FICO score include:

• Payment History (35%)
  • Whether credit card and loan repayments are made on time.
  • Presence of past delinquencies or defaults.
• Amount Owed (30%)
  • The ratio of the amount used to the credit card limit (credit utilization rate).
  • A utilization rate of 30% or less is considered ideal.
• Length of Credit History (15%)
  • The length of time credit accounts have been held. A longer history indicates reliability.
• New Credit (10%)
  • Frequency of applications for new credit cards or loans.
  • Submitting multiple applications within a short period can lower the score.
• Types of Credit Used (10%)
  • A diverse mix of credit, such as credit cards, home loans, and education loans, is rated more favorably.

FICO scores impact not only loan and credit card approvals but also rental agreements, insurance premiums, and even job applications.

Tips for Improving Your Credit Score

To boost your credit score, consider the following:

• Make payments on time.
• Keep credit utilization below 30%.
• Maintain a long credit history.
• Avoid applying for too much new credit in a short time.
• Regularly check your credit score.

Challenges with Credit Scores

Credit scoring methods can be complex and difficult for many to understand. Furthermore, immigrants and young people with no credit history often face disadvantages, leading to difficulties in accessing financial services. Privacy concerns regarding the handling of data required for credit scoring are another issue.

Credit Scoring in China: The Sesame Credit Example

China’s credit scoring system has garnered global attention. A notable example is Sesame Credit (芝麻信用), provided by Ant Financial, part of the Alibaba Group. It uses credit scores for various societal applications. High scores offer benefits such as waived deposits for car rentals or preferential loan rates. In some cases, families even consider scores when evaluating potential marriage partners.

Sesame Credit evaluates users based on factors such as “personal traits,” “fulfillment ability,” “credit history,” “social connections,” and “behavioral preferences.” Compared to the U.S.’s FICO score, Sesame Credit incorporates broader and more detailed personal data.

Social Impact and Challenges

The widespread use of credit scores in China has had the following effects:

• Reduced theft in unmanned stores.
• Increased return rates for free rental umbrellas.
• Fewer disputes over payment after services.

However, challenges include excessive data collection, falsification of information to improve scores, and income or occupational disparities leading to score gaps.

Credit Scoring in Japan

Japan has three major credit information agencies: CIC, JICC, and KSC. Each agency manages information for different purposes. While some of the data they hold overlaps, it is not entirely identical.

• CIC handles information primarily from credit card companies and consumer finance companies.
• JICC focuses on managing consumer finance information.
• KSC centers on banking-related information and includes data such as utility payment records.
  These agencies cover different areas of credit information.

Consumers and businesses can request disclosure to check the information registered about them. However, credit scores themselves have not been disclosed so far, which has contributed to a lack of understanding of individual credit standings.

Introduction of Credit Guidance

Starting in late November 2024, CIC will launch a new service called “Credit Guidance,” which provides consumers and businesses with credit scores calculated based on their credit information. This service will display a three-digit score along with the main factors that influenced the score.

The goal of this initiative is to help consumers understand their credit status, improve financial literacy, and prevent over-indebtedness. For member companies, the service is expected to facilitate appropriate credit agreements and standardize credit evaluation, contributing to the promotion of digital transformation.

Scoring Criteria and Usage

The Credit Guidance score is calculated based on objective data such as payment history, outstanding balances, the number of contracts, the duration of contracts, and the number of applications submitted. This allows users to view their credit information in a transparent manner.

Disclosure requests require a fee of 500 yen via the internet or 1,500 yen via mail. The score and four key influencing factors are disclosed. Additionally, score distribution data shows that the average score typically falls within the range of 630 to 709 points.

Other Credit Score Initiatives in Japan

In recent years, several new credit score initiatives have emerged:

• J.Score: Launched in 2017 by Mizuho Bank and SoftBank, this service aimed to provide a new credit scoring system for consumers. However, despite growing user registration, borrowing performance stagnated, leading to its termination in 2022.
  Reasons for this included:
  • Users with high scores were unable to secure loans.
  • Loans for users with low scores were challenging.
  • Differences from conventional credit scores were unclear, which discouraged active use.
  • Insufficient explanation to users.
• Docomo Score Link: Since August 2019, NTT Docomo has offered this service using its lending platform. It calculates scores based on various user data, leveraging big data. The scores are made available for financial institutions to use in credit evaluations.
• M.Score by MILIZE: In February 2024, fintech company MILIZE introduced “M.Score,” a SaaS-based credit scoring model developed in collaboration with Tensor Consulting. By answering questions via a smartphone or computer app, consumers can calculate their own credit score. The service aims to make credit scores more accessible and relevant to consumers, with expectations for broad usage scenarios.

These efforts represent steps toward exploring new approaches to credit scoring in the financial industry, and further improvements are anticipated in the future.

Challenges and Prospects for Widespread Adoption of Credit Scores

Efforts related to credit scores are expected to become increasingly important. With the enhanced disclosure functions of agencies like CIC, credit score awareness is likely to grow. However, several steps are necessary for broader adoption:

1. Expanding the Utility of Credit Scores: Credit scores should be applicable in various situations, promoting the perception that “having a credit score is useful in many contexts.”
2. Improving Financial Literacy: It is crucial to ensure that people understand what credit scores represent and how they affect borrowing.
3. Advancing Digitalization: Utilizing AI and big data to simplify credit score calculations is essential. Allowing businesses to check and track scores anytime through smartphones can increase convenience.
4. Cultural Perception Shift in Japan: Traditionally, debt has been viewed negatively. However, it is necessary to reposition credit scores as a “positive indicator of personal trustworthiness.” This shift in perception will accelerate the adoption of credit scores.

As developments surrounding credit scores continue to accelerate, addressing these challenges, enhancing their utility, improving financial literacy, and advancing digitalization will be key to their successful integration.