How Long Have Credit Scores Been Around?
Understand the complete history of credit scores, from their initial concepts to their role as a cornerstone of modern finance.
Credit scores play a role in modern financial decisions, influencing everything from securing a loan to renting an apartment. These numerical summaries of creditworthiness often determine access to financial products and services. Understanding their origins and evolution provides insight into how lending and borrowing have transformed. This exploration traces the historical path of credit evaluation, from subjective beginnings to today’s data-driven systems.
Early Methods of Credit Evaluation
Before standardized credit scores, lenders relied on subjective methods to assess an applicant’s ability to repay debt. Decisions were often based on personal relationships, community reputation, and direct inquiries with local merchants or creditors. This approach meant credit evaluation was inconsistent and prone to bias.
As lending expanded beyond small, close-knit communities, the need for more structured information became apparent. In the late 19th and early 20th centuries, early credit bureaus emerged to centralize basic financial data. Companies like the Retail Credit Company, founded in 1899 and later known as Equifax, began collecting written records about consumers’ borrowing and repayment habits, selling these reports to lenders and insurers. These early reports provided documented histories but did not include numerical scores or statistical models.
The Birth of Standardized Credit Scoring
The foundation for modern credit scoring was laid in the mid-20th century with the establishment of Fair, Isaac and Company (now FICO) in 1956. Founders Bill Fair and Earl Isaac aimed to apply statistical modeling to standardize business decisions. They developed their first credit scoring system in 1958, initially selling these algorithms to individual businesses.
In 1989, FICO introduced its first universal credit score for widespread use across the lending industry. This innovation allowed lenders to use a consistent, objective measure to assess risk, reducing bias and increasing efficiency. The FICO score utilized key components of a consumer’s financial behavior, such as payment history, total amounts owed, and credit history length, to generate a three-digit score. This standardized approach gained acceptance.
Modern Credit Score Development
The evolution of credit scores continued with legislative changes and technological advancements. The Fair Credit Reporting Act (FCRA), enacted in 1970, impacted consumer credit by regulating the collection, dissemination, and use of credit information. This federal law aimed to promote accuracy, fairness, and privacy in consumer reports, granting individuals rights regarding their credit data. The FCRA helped standardize credit reporting practices and provided a framework for consumer protection.
Over time, credit scores expanded beyond traditional loan approvals. Today, these scores are routinely used in various financial and personal contexts, including insurance underwriting, rental applications, and some employment screenings. The early 2000s saw the emergence of alternative scoring models, notably VantageScore, introduced in 2006 by the three major credit bureaus—Equifax, Experian, and TransUnion. VantageScore provided a competing model. Further technological advancements, such as big data and artificial intelligence, continue to influence modern scoring models, allowing for nuanced risk assessments and broader consumer coverage.