As a European citizen I am somewhat puzzled by how American credit scores work. The US is one of the few, possibly the only country where such a strong focus is put on the utilization history of personal credit (cards), to the point where people try to work out the best strategy to optimising their credit score.
As I understand it most other countries would build a credit report based on debt payment history (utilities, taxes, bills), income and the presence of any registered instances of non-payment. However, as stated in this article, that's only a minor element of an American credit report:
There are those (such as Dave Ramsey) who will tell you to avoid all credit cards. This is nonsense. Graduate college, get a good job, save for a house, and you’ll find that without any credit history your options to get a mortgage will be limited despite the nice downpayment and low debt to income that new mortgage would cost you.
While I understand that this type of credit score will easily weed out true bad apples, I cannot see the advantage in this type of scoring for ranking people with no history of non-payment.
While I can't speak for all of Europe, in my experience the majority of credit cards are never used except for online purchases or in places where debit cards are not accepted. People then generally set-up direct debit to pay off the balance automatically each month. These cards never accrue interest and likely see a limit utilization of 0-5% per month. Owning a credit card is also still not that common.
In the end, it seems to me like the credit score boils down to having a proven track record of spending your money. This just does not strike me as a particularly effective metric. What then are the reasons that this system is still being used?
I struggled somewhat with writing my thoughts on this down. Note that I'm not looking for a debate but want to find out how and why this system of credit scoring came about and if it is actually proven effective. I've read statements from banks that "it does" and I'm sure it works for non-payers but have found little about its value for the rest of us.