How Long Has Credit Score Been Around?

A credit score serves as a concise, three-digit numerical representation of an individual’s credit risk at a specific point in time. This financial tool plays a significant role in modern finance. Lenders use credit scores to evaluate a borrower’s likelihood of repayment, influencing decisions for loans, credit cards, and housing applications.

Pre-Standardized Credit Assessment

Before standardized credit scores, assessing creditworthiness relied on subjective evaluations. Lenders depended on personal relationships, local reputation, and their judgment of an individual’s character. Lending decisions were based on trust and perceived reliability.

The 19th century saw the beginning of early credit bureaus, which centralized borrower information. For instance, early bureaus like the Mercantile Agency (1841) and the Retail Credit Company (1899) collected data on individuals and businesses. These agencies gathered factual data, such as payment history and defaults, compiled into manual records. However, these methods often incorporated subjective opinions and lacked a universal numerical system for objective assessment.

The Fair Credit Reporting Act (FCRA) of 1970 regulated the credit reporting industry. This legislation mandated that credit bureaus provide access to files and prohibited discriminatory or unverified information. This standardized the collection and reporting of credit information.

The Genesis of Credit Scoring

The foundation for modern credit scoring was laid in 1956 with the establishment of Fair, Isaac and Company (FICO). Engineers Bill Fair and mathematician Earl Isaac developed their first credit scoring system in 1958. This system provided a statistical approach to evaluating credit risk.

The first general-purpose FICO score was commercially introduced in 1989. This aimed for greater efficiency, objectivity, and consistency in lending decisions. The algorithmic and statistical nature of the FICO score represented a revolutionary shift from subjective judgments.

Initial adoption began with national department store chains in the late 1950s. Credit card issuers, auto lenders, and banks soon followed. By 1995, FICO scores expanded significantly when Fannie Mae and Freddie Mac began requiring them for mortgage applications, establishing FICO as a standard measure of consumer credit risk.

Evolution of Scoring Models

Since its initial introduction, the FICO scoring model has undergone periodic updates to adapt to changes in consumer credit behavior and data availability. Various versions, such as FICO 8, FICO 9, and the FICO 10 suite (including FICO 10 and 10T), have been released over the years. These updates refine algorithms and incorporate new data points to maintain predictive accuracy. FICO also developed specialized scores for specific lending industries.

Competing models emerged, such as VantageScore, a joint venture of the three major credit bureaus, launched in 2006. This alternative aimed to provide greater consistency and inclusivity in scoring, especially for consumers with limited credit histories.

VantageScore has also evolved through several iterations. These models incorporate statistical techniques and machine learning algorithms. Their ongoing development reflects a continuous effort to enhance predictive power.

Current Credit Score Components

Credit scores are primarily derived from information in a consumer’s credit report. While exact calculations are proprietary, major models like FICO and VantageScore consider similar categories of information.

The five primary categories influencing a FICO score include:
Payment history: Reflects how consistently bills are paid on time.
Amounts owed: Considers total outstanding debt and the utilization of available credit, indicating how much credit is currently being used relative to the credit limits.
Length of credit history: Factors in how long credit accounts have been established, including the age of the oldest and newest accounts, and the average age of all accounts.
New credit: Pertains to recent applications and newly opened accounts, as frequent credit-seeking can sometimes indicate increased risk.
Credit mix: Considers the diversity of credit types managed, such as revolving credit and installment loans.