The financial history of the United States is rich, fascinating, and reflects the growth of the country. This history also includes the origin and evolution of credit scores. Credit scores were invented in the 1950s. Before that, lenders used different methods to determine whether they wanted to work with an applicant. The interesting thing about these qualification methods is that some of these ideas are still present in current credit scoring guidelines. While other methods which were unfair and unnecessary have been weeded out.
Keep reading to learn about when credit scores and credit bureaus where invented!
Before Credit Scores Were Invented
Before credit scores were invented, representatives from financial institutions would speak to other local businesses and sometimes people to determine whether an applicant was reliable with their money. At the time, many communities were close-knit. If someone wasn’t good with other people’s money, chances were that a representative wouldn’t have to dig too deep to determine potential risk.
Financial representatives could also do some research with the only credit bureau of that time, The Retail Credit Company (or RCC, now known as Equifax). This company would collect all kinds of personal details on Americans who borrowed money—some of which had nothing to do with reliability.
What You Would Experience as a Consumer Looking to Borrow Money Before Credit Scores Where Invented
Let’s say you were trying to borrow money at that time. In addition to talking to local businesses, a lender would also focus on more surface qualities. All of which are illegal within financial institutions today (thanks to fair lending laws and regulations). Arbitrary traits for lending purposes like presence, personality, how you spoke, your clothing, and other first impressions were a considerable part of the qualification. Most of us now know that those kinds of surface-level judgments don’t have any place in financial transactions and are unjust and unreliable.
However, before credit scores and credit reports, which are relatively recent, lenders, businesses, and individuals from varying communities all used these methods for thousands of years! And although unfair, this chapter is an essential part of the United States’ financial history. These practices also made way for a better, fairer system, which emerged in the 1950s.
The 1950s: Credit Scores Emerge; Fair Isaac and Company
Engineer Bill Fair and Mathematician Earl Isaac were colleagues at the Stanford Research Institute. While working with numbers and data all day, they happen to converse, and much like every great conversation, they leave with an idea. They realized that a data-driven reliability model could better evaluate applicant reliability.
Not only that, but data could also create an unbiased and standardized model, which would better serve businesses and consumers. In 1965, they founded Fair Isaac and Company—the first credit scoring system in the United States. The company made its first sale two years later, and 1958 was the first time a credit scoring system was used by a lender.
This first usage helped the company move forward and began the process of building the modern credit score system we have for American consumers and American-owned businesses today.
Fair Isaac and Company was later named FICO and was introduced to the public in 1989. And very shortly after that introduction—its product the FICO score, a rating of creditworthiness, took its place as an industry standard.
Credit Scores Ranges in the Late 1900s
A FICO credit score actually hasn’t changed a ton since they were introduced. The scale has always been 300-850, with 300 being the lowest and 850 being the best score possible.
Like a FICO score from the late 1900s, today’s FICO score depends on payment history, number of accounts, the age of credit accounts, types of credit, and credit inquiries. A lender can determine credit risk by looking at a person’s FICO score to decide whether they want to lend to that borrower in the first place. If so, and how much money they are willing to lend.
1899 To 1999: A Century (Almost) of The Birth and Evolution of Credit Bureaus and Addition of the FICO Score
Over about a 100-year period, credit bureaus started, evolved, and either did well or were simply bought out. By the late 90s only a few credit bureaus remained. In present times three major credit bureaus exist—Equifax, TransUnion, Experian—and knowing how they started is essential when trying to learn about the history of credit scores. Below is more information on the origins of the major credit bureaus in the United States.
Equifax (Previously Known as The Retail Credit Company)
As mentioned earlier, the first credit bureau was founded in 1899 called the Retail Credit Company (RRC). About 60 years after its founding, work, and data, the company had a paper trail on millions of Americans. RCC was one of the first bureaus to digitize this data, but they were met with criticism, lawsuits, and restrictions.
The company was able to bounce back from this backlash and adapted to new guidelines. To separate themselves from their old identity, the company was renamed Equifax Inc. In the 1980s, Equifax quickly acquired smaller credit bureaus all over the country.
While taking over, Equifax also began to diversify its products, offerings, and methodologies. By 1986 the company’s files covered 150 million people in 28 states. Equifax capacity grew 40 percent in the following year to cover all 50 states.
TransUnion
TransUnion was founded in 1968 by a railcar leasing company called the Union Tank Car Company. After acquiring the Credit Bureau of Cook County (CBCC), TransUnion began its work in the credit bureau industry. In the next 10 years, TransUnion grew to service the entire United States. And at this point, they were an established credit bureau.
Experian
Experian went through various ownership changes and began in the UK. Its work in the United States began in 1986 as GUS, and in 1996 became Experian.
1991: The Year FICO Scores Where Available from Credit Bureaus
Although FICO was selling its scoring model to lenders, it wasn’t until 1991 that the major credit bureaus started using this credit scoring method. In addition to all three of the major credit bureaus—Equifax, TransUnion, and Experian—using a FICO Score, in 2006, they established a Vantage Score.
2006—The VantageScore from The Three Credit Bureaus
In 2006, the three major credit bureaus /credit reporting agencies established VantageScore Solutions, which offers another credit scoring model in addition to a FICO scoring system. The earlier versions of the VantageScore ranged from 501 to 990. VantageScore’s latest models share the same 300 to 850 scale as FICO credit scores.
The Impact and Milestones for Credit Scoring and for Credit Bureaus
Your credit score and credit history determine your creditworthiness, which will impact more than just loans you can take out or credit cards that you could get. Most people when thinking of credit, may only think about accessible fast cash loan options or the credit cards. However, your credit score can affect the type of home you can buy or rent and can even mean the difference between getting a job or being overlooked!
Because of these implications, some laws and regulations are in place that helps protect consumers. There are several tools that consumers can use to navigate and understand how their credit score works and how lenders use their personal information about finances.
Over the years there have been legislative milestones that were meant to protect American consumers and businesses.
1968—The Truth in Lending Act (TILA)
The TILA’s primary purpose was to standardize how the cost of a loan, mortgage, car loan, credit card, and other consumer products that fall under this umbrella are presented. Through TILA, the transparency of APR was introduced, which was a massive deal in the lending industry. The Fair Credit Billing Act also falls under TILA as an amendment.
1970—The Fair Credit Reporting Act (FCRA)
The Fair Credit Reporting Act was passed when credit bureaus digitized consumer information. The FCRA helps protect consumers by regulating how others can use and access your credit report information. Here are some of the rights that the FCRA provides:
- The right to notice if you are denied an application for credit, insurance, or employment.
- You have the right to know precisely what is in your credit report. And consumers get access to a free annual credit report from each major credit bureau.
- Regulation of who can view your credit report and score.
- The right to dispute and fix errors on your credit report.
- The ability to freeze your credit.
- You must consent to credit report access and credit checks.
1974 — Fair Lending Laws
The Equal Credit Opportunity Act (ECOA) was enacted in 1974, which makes it unlawful for any creditor to discriminate against any applicant, concerning any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age. The Fair Housing Act (FHA) provides the same protection for borrowers seeking a mortgage loan with bad credit or good credit.
2003—Fair and Accurate Credit Transaction Act
The Fair and Accurate Credit Transaction Act was an amendment to the FCRA, which was designed to improve credit reports and records accuracy. In addition to maintaining accurate information, one of the significant additions includes a “red flag” program to help prevent or alert people about identity theft.
2011—The Consumer Financial Protection Bureau (CFPD)
The Consumer Financial Protection Bureau was created to help consumers. It ensures that financial institutions like banks, credit unions, and other private financial institutions treat all customers fairly. They also ensure that these companies are following laws and regulations. Consumers from all across the country can file complaints, access financial tools, learn more about finances, and more.
Over the years, the CFPB has created all kinds of reports based on data, trends, and general security mistakes that these credit bureaus have made. This is the best place to start when you are having trouble with a credit bureau or need more information on what is going on with them.
Check out the rest of the CreditNinja Dojo to answer more questions like “when did credit scores become a thing?”
References:
Fair and Accurate Credit Transactions Act of 2003 | Federal Trade Commission
Company History | TransUnion
https://time.com/3961676/history-credit-scores/
Learn About The FICO® Score and its Long History
A brief history of the credit score – Marketplace
Consumer Financial Protection Bureau
Credit and Your Consumer Rights
Credit Protection Laws – The Consumer Credit Protection Act
