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A Brief History of Credit Scores
Your credit score is, for better or worse (and often worse) one of the more important numbers in your adult life. It dictates if you can get a loan and what rate you’ll pay. It could determine if you can ever own your own home. It might even determine if you get that dream job.
But how did this important number come to be? What secret Illuminati council first started tossing bank stubs and “past due notices” into a mysterious cauldron that spit out credit scores?
Okay, well, it definitely didn’t start like that. Instead, it went a little something like this …
For millennia, creditworthiness was judged on a much more casual basis.
Since the first caveman, Gug, asked his neighbor, Gorf, to borrow some wood to make a fire, lenders have had to consider whether the loans they offer will be paid back.
Sure Gug said that he “promise make fire with wood, give back more wood and cooked meat tomorrow,” but could Gug be counted on? What if Gug runs away to a different cave and Gorf never sees his wood again?
Perhaps Gorf could ask some of their fellows if Gug is reliable.
And that’s pretty much how things worked for the next tens of thousands of years. Even as early credit bureaus started to emerge, representatives would often speak to local businesses to find out if a particular applicant was reliably paying the money they owed in a reasonable manner.
Additionally, potential lenders would usually rely on character judgments. Maybe the person who walked into their office always paid their bills on time, but the loan officer just didn’t like something about the way the applicant conducted themselves. In which case: “No loan for you!”
That may not sound fair to you, and who do you turn to when something isn’t fair? Well, Bill Fair, himself, of course.
Credit scores were invented in the 1950’s.
In 1956, engineer Bill Fair teamed up with mathematician Earl Isaac to create Fair, Isaac and Company, with the goal of creating a standardized, impartial credit scoring system. Within two years, they had begun selling their first credit scoring system.
Today, that company goes by a different name: FICO.
The current FICO score system debuted in 1989 and has become the industry standard. It is a number between 300 and 850 determined by the following factors (by descending level of importance): payment history, amounts owed, length of credit history, types of credit used, and recent credit inquiries.
And who keeps track of those factors? The three major credit bureaus, of course!
An even briefer history of the credit bureaus.
The three major credit bureaus, Experian, TransUnion, and the always reliable Equifax, track your financial information to determine your credit score. Each of those companies has its own unique history.
Equifax is the oldest of the three credit bureaus, dating all the way back to 1899, when it was known as the Retail Credit Company. They were one of those early credit bureaus we mentioned above, and they would collect all manner of information about potential credit seekers, including personal details, like marital troubles or political opinions.
Criticism of these practices helped lead to the Fair Credit Reporting Act. And then Equifax never had any problems ever again.
TransUnion was founded in 1968 as a railroad leasing organization. Apparently, railroads weren’t interesting enough, because they immediately acquired the Credit Bureau of Cook County.
Experian is the newest of the credit bureaus. It was founded in 1996, making it a certified 90’s kid. We bet it loves pogs.
As a result of the Fair and Accurate Credit Transactions Act of 2003, you are entitled to a copy of your credit report from each of the three major credit bureaus once per year. To request one of these copies, just visit www.AnnualCreditReport.com.
Credit scores have done a lot. But many problems remain.
So knowing that the goal of the FICO credit score was the creation of a more fair system, was that goal reached?
Sort of! A FICO score is probably a more impartial way to handle credit approval than just having some bank representative make a superficial judgment about potential applicants. But algorithms can actually reinforce racial disparities that already exist.
And even if an applicant qualifies for a better rate, an unscrupulous lender could still take advantage of them, as happened before the subprime housing crisis, when minority applicants who qualified for prime loans were given subprime loans instead.
But there are issues beyond racial discrimination, inaccuracies, and data breaches. On a basic level, you need to take out some form of a loan—whether it be in the form of credit card use or otherwise—to build up your credit score. Theoretically, you could be very financially responsible without ever using credit cards or going into debt … and that would leave you without any credit score to speak of.
We don’t know what the future of credit scores looks like, but hopefully, it’s a system with fewer mistakes and more fairness.