When Were Credit Scores Invented? A Journey Through Financial History

Camino Financial22 Feb 2024
When Were Credit Scores Invented? A Journey Through Financial History

Credit scores affect the financial health of both people and companies. Contrary to common belief, they are not a recent innovation. They have nearly 200 years of history.

This article will help you learn about:

  • the origins of credit scores
  • the people who created this important rating

Let's dive in.

Table of contents
1. The Early Beginnings of Credit Report
2. When Was The Credit Score Invented?
3. The Rise Of The FICO Score
4. The First Credit Bureau
5. The Transformation Into Equifax: A New Era In Credit Reporting
6. The Three Major Credit Bureaus
7. Modern Credit Scoring Models
8. FAQs

The Early Beginnings of Credit Report

Credit reporting started in the early 1800s. It created the basis for today's advanced financial systems.

This change happened because businesses and individuals needed to prove they were trustworthy with money during rapid industrial growth.

Back in the 1800s, as business grew, traders needed to know if they could trust their distant partners.

These partners were often in faraway cities or different countries.

At first, people relied on informal trust networks. They used personal recommendations and local reputation to judge someone's reliability.

But as business expanded and deals got more complicated and spread out, these old ways were not enough.

The first formal attempt to provide a solution to this challenge came in the form of commercial credit reporting agencies.

Lewis Tappan as The Pioneer

One of the pioneers in this field was the Mercantile Agency, founded by Lewis Tappan in New York City in 1841.

Tappan's agency collected and sold credit information on merchants across America, using a vast network of correspondents.

Early reports, handwritten and subjective, often assessed individuals based on their moral character rather than solely on their financial stability.

This innovation marked a significant shift in the evaluation of business risk. Introducing a more systematic and scalable approach.

When Was The Credit Score Invented?

The invention of credit scores, a pivotal development in the financial industry, marked a significant evolution from the early days of credit reporting.

Credit scores, as we know them today, emerged in the mid-20th century. Fundamentally changing the way lenders assess borrowers' creditworthiness.

Knowing Bill Fair and Earl Isaac - The Fathers of the FICO Score

Engineer Bill Fair and mathematician Earl Isaac introduced the concept of a numerical credit score in 1956.

They started a company called Fair, Isaac and Company, now called FICO. They aimed to make a standard, fair way to decide how risky it is to lend money to someone.

Before FICO, lenders manually reviewed credit reports. This process was time-consuming and prone to bias.

Fair and Isaac wanted to change this. They used math models to guess how likely someone was to pay back a loan.

The Rise Of The FICO Score

The first credit scoring system was a result of their efforts, and it revolutionized the lending process.

Initially, primarily credit card companies and consumer loan businesses used credit scores.

It wasn't until the 1970s that FICO scores started to gain widespread acceptance among various types of lenders, including mortgage companies.

The adoption of credit scores gained further momentum in 1975.

Fannie Mae and Freddie Mac, two of the largest backers of residential mortgages in the United States, recommended the use of credit scores for mortgage lending.

This endorsement significantly boosted the use of credit scores, making them a standard part of the lending process.

Over the years, credit scoring systems have gotten better. They started using advanced statistics and more types of credit data.

Today, FICO scores play a critical role in the lending industry, influencing the terms under which lenders offer credit to consumers and businesses alike.

The First Credit Bureau

In 1899, the Retail Credit Company (RCC) started in Atlanta, Georgia, building on earlier credit reporting efforts.

It was a key development in the area of consumer credit reports.

RCC emerged to handle the growing complexity of loans, store credits, and installment plans as the American economy expanded around the 20th century.

It quickly became very important in the credit industry by collecting and analyzing data on people's spending and borrowing habits.

This information was crucial for lenders trying to understand how likely people were to pay back their loans.

As RCC grew, it helped shape how to do credit reporting.

However, it also started discussions about privacy and the accuracy of the data. These discussions led to the creation of the Fair Credit Reporting Act (FCRA) in 1970.

The Transformation Into Equifax: A New Era In Credit Reporting

The Retail Credit Company changed its name to Equifax because of changes in the industry and new rules.

This was a big step in updating its look and how it works to fit a fast-changing financial world.

Now, Equifax is a leading company in credit reporting worldwide. It plays a big role in decisions about loans and credit by using detailed data and analysis.

The change to Equifax shows how credit reporting agencies have grown and changed over time.

They are very important in making it easier to get credit.

By sharing deep insights into how people handle credit, agencies like Equifax help the economy grow and make it easier for more people to get loans, shaping the future of borrowing.

The Three Major Credit Bureaus

Equifax, Experian, and TransUnion are foundational to the global financial system, significantly influencing the lending process.

Each bureau compiles extensive credit information on consumers, aiding lenders in making informed decisions.

Equifax: Pioneering Credit Insights

Founded in 1899 as the Retail Credit Company, Equifax stands as one of the oldest credit reporting agencies.

Headquartered in Atlanta, Georgia, it has expanded its reach globally, offering detailed credit reports compiled from various data sources.

Equifax emphasizes data integrity and has focused on enhancing security measures in response to cybersecurity challenges.

Experian: A Global Leader in Credit Services

Originating in London in 1980 as CCN Systems, Experian has grown into a global information services giant.

It has gained renown for its analytical tools and comprehensive credit histories, which help make responsible lending and borrowing decisions.

Experian combines global reach with local expertise, providing valuable insights into consumer credit behavior.

TransUnion: Advancing Financial Health

It started in 1968, diversifying into credit reporting to become a key player in risk management and credit information.

It offers a broad spectrum of services. From credit scores to fraud prevention, aimed at enhancing financial health and inclusion.

TransUnion leverages information to help consumers and businesses make smarter financial choices.

Modern Credit Scoring Models

Today's credit landscape features a myriad of scoring models.

Yet one name stands out for its widespread acceptance among lenders: the FICO credit score

This credit scoring model was pivotal, with claims that 90% of top lenders rely on them for evaluating creditworthiness.

Since its launch in 1989, this credit bureau has refined its models to better reflect the nuances of consumer behavior, offering scores that range from 300 to 850.

Higher scores indicate a borrower's greater likelihood of repaying loans punctually and in full.

Credit scoring, like the FICO model, has changed from old methods. It no longer uses personal traits such as:

  • Race
  • Age
  • Gender
  • Marital status

Today, the calculation of an individual’s credit score hinges on five critical financial behaviors and credit management practices:

  • Payment History (35%): The timeliness of past payments on credit accounts.
  • Amounts Owed (30%): The ratio of current credit usage to total available credit, known as the credit utilization rate.
  • Length of Credit History (15%): The duration over which one has maintained credit accounts.
  • New Credit (10%): The frequency of new account applications and openings.
  • Credit Mix (10%): The diversity of credit types managed by the individual, including credit cards, loans, and mortgages.
  • Credit Scores: From Basics to Benefits

A robust credit score is crucial for several reasons, serving as a vital component of your overall financial health.

Here’s why maintaining a good credit score is essential:

  • Loan and Credit Approval. A good credit score makes it easier to get loans. This includes home loans, car loans, and personal loans.
  • Favorable Interest RatesHigher credit scores often qualify for lower interest rates, which can result in significant savings over the life of a loan.
  • Utility Services and Rentals. Utility companies and landlords check your credit score. They use it to set your deposit and decide if you can get services or rent a place.
  • Access to Better Financial Products. A good credit score can provide access to premium credit cards and loans with more favorable terms and benefits.

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What are the 3 national credit bureaus?

The three national credit bureaus in the United States are Equifax, Experian, and TransUnion.

What are the other credit bureaus?

  • Innovis - Sometimes referred to as the "fourth" credit bureau, Innovis provides credit reporting services similar to the big three but is less commonly used by lenders.
  • ChexSystems - A nationwide specialty consumer reporting agency that tracks banking history, such as checking and savings account closures, primarily used by banks and financial institutions to assess the risk of opening new accounts.
  • CoreLogic Teletrack - A credit reporting service that focuses on payday loans, rent-to-own agreements, and other types of lending not typically covered by the major credit bureaus.
  • National Consumer Telecom and Utilities Exchange (NCTUE) - Provides information related to telecommunications, pay TV, and utility (electric, gas, water) services accounts.

What is a good FICO score?

A good FICO score typically falls within the range of 700 to 850. However, keep in mind that lenders may have their own criteria for what they consider a good score based on the type of credit they're offering. This table explains what each score means:
  • 750 to 850 = Excellent
  • 700 to 749 = Good
  • 650 to 699 = Fair
  • 550 to 649 = Poor
  • 300 to 549 = Bad

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