What Was Used to Assess Credit Before Credit Scores?

Modern credit scores, like those from FICO or VantageScore, are deeply integrated into today’s financial landscape, influencing everything from mortgage approvals to credit card limits. These three-digit numbers provide a quick, standardized assessment of an individual’s creditworthiness, based on a complex algorithm analyzing credit history. Before the widespread adoption of such scoring systems, lenders relied on different methods to evaluate risk. This article explores the historical approaches used to determine who received credit before standardized scores became the norm.

Community and Character-Based Lending

In earlier periods, credit assessment was often deeply rooted in personal relationships and an individual’s standing within their local community. Lenders, often local merchants or neighbors, extended credit based on direct knowledge of a person’s character, reputation, and payment habits. This informal system relied heavily on trust and the social capital an individual had accumulated.

A local grocer, for instance, might extend credit for food staples to a family based on their long-standing presence in the community and a history of prompt payments. Similarly, informal loans between community members were common, secured by mutual trust and a person’s reputation for financial reliability. The concept of an “IOU” or “putting it on my tab” exemplifies this era, where a verbal agreement or a simple written note served as the contract.

Word of mouth played a significant role in these assessments. If an individual had a reputation for honesty and diligence in their financial dealings, they were more likely to receive credit. Conversely, a history of defaulting or unreliable behavior would quickly spread, making it difficult to obtain credit from anyone in that community. This localized approach meant that credit decisions were subjective and highly dependent on the lender’s personal experience and perception of the borrower.

Manual Verification and Reference Checks

As lending became more formalized and expanded beyond immediate community circles, institutions like banks developed more structured, manual methods for assessing credit risk. This involved gathering information through inquiries and verifications. Lenders would frequently request references from applicants, which served as external endorsements of their financial standing and reliability.

Common types of references included bank references, where lenders contacted other banks to inquire about financial habits, account balances, or late payments. Trade references were also crucial, involving inquiries with suppliers or businesses with whom the applicant had established credit. These checks would confirm payment terms, credit limits, and the applicant’s record of fulfilling obligations.

Employer verification was standard practice, confirming an applicant’s employment status, salary, and job stability. This provided insight into the borrower’s capacity to repay debt. Loan officers also conducted direct interviews with applicants, manually reviewing personal finances, assets, and outstanding debts. During these interviews, factors like the applicant’s length of residence and overall stability were assessed, as these were considered indicators of reliability.

The evaluation process also involved manually calculating financial metrics, such as debt-to-income ratios, to determine repayment capacity. If collateral was offered, its value would be manually appraised to ensure it provided adequate security for the loan. This detailed, labor-intensive process required significant time and human judgment from credit analysts to compile and interpret information.

Early Credit Bureaus and Information Sharing

Early credit bureaus marked a significant step toward systematic data collection for credit assessment, serving as precursors to today’s major credit reporting agencies. These entities appeared in the United States in the 19th century, addressing the growing need for information as commerce expanded. Initially, these bureaus focused on collecting and sharing negative information about individuals and businesses, such as instances of non-payment, bankruptcies, or other financial delinquencies.

Merchants and lenders would report customers who failed to meet their obligations to these shared databases. This information was often compiled in ledger books or early card systems, accessible to subscribing members. The purpose was not to generate a predictive score, but rather to provide a centralized repository of past financial failures, allowing potential creditors to identify high-risk individuals or entities.

The decision-making process based on this compiled data remained manual and subjective. Lenders would review the raw information, interpreting the reported history to make their own judgment about an applicant’s creditworthiness. While these early bureaus did not provide a “score,” they improved upon individual reference checks by offering a broader view of an applicant’s payment history across multiple creditors. The Retail Credit Company, founded in 1899 and later known as Equifax, exemplifies these early efforts to centralize consumer credit information.