What Year Were Credit Scores Invented?

Credit scores play a significant role in modern financial transactions, influencing everything from loan approvals to interest rates. While these three-digit numbers seem like a contemporary innovation, the practice of evaluating an individual’s financial reliability has a long and complex history. Understanding the evolution of credit assessment provides insight into how these scores became an indispensable part of economic life.

Early Credit Assessment Practices

Before the development of standardized credit scores, lenders and merchants relied on various manual and often subjective methods to gauge a borrower’s trustworthiness. In the 1800s, local entities emerged that collected information on consumers and businesses. These early credit bureaus often relied on personal reputation, local knowledge, and direct inquiries to other creditors. Merchants kept ledgers, noting payment habits, and informal networks often shared information about individuals’ financial character.

The Mercantile Agency, founded in 1841, was an early attempt to systematize credit evaluation for businesses by soliciting information from correspondents nationwide. However, the data collected was often subjective, reflecting biases related to race, class, and gender. This manual process was time-consuming and inconsistent, lacking a uniform standard for assessing risk. Such limitations highlighted the need for a more efficient and objective system as consumer credit began to expand.

The Birth of Credit Scoring

The concept of modern credit scoring originated in 1956 when engineer Bill Fair and mathematician Earl Isaac founded Fair, Isaac and Company. Their objective was to create a standardized, objective credit scoring system using statistical analysis. FICO aimed to apply mathematical models to credit data to predict borrower default. This approach offered a significant departure from the subjective assessments prevalent at the time.

Fair and Isaac began selling their statistical scorecard in 1958, though initial adoption was slow. Only American Investments initially adopted their system. Department store chains were among the early adopters in the late 1950s, recognizing the need for an efficient way to assess creditworthiness for their growing customer base. The fundamental concept behind their work was to use past financial behavior to forecast future risk, providing a consistent and objective measure for lenders.

Evolution and Widespread Adoption

Following its invention, the adoption of credit scoring gradually expanded beyond initial users. By the early 1970s, credit card issuers, auto lenders, and banks began to widely utilize the Fair Isaac system. The growing reliance on credit reporting led to increased concerns about data accuracy and consumer rights. This prompted the passage of the Fair Credit Reporting Act (FCRA) in 1970, establishing rules for collecting, reporting, and accessing credit information, and giving consumers the right to dispute inaccuracies.

Consolidation of local credit bureaus into larger networks facilitated widespread score use. The three major credit bureaus—Equifax, Experian, and TransUnion—emerged as central repositories for consumer credit data. In 1989, FICO introduced its first general-purpose FICO score, which quickly became an industry standard.

FICO score’s widespread use was boosted in 1995 when Fannie Mae and Freddie Mac mandated its use for residential mortgage applications, integrating it into lending. In 2006, the three major credit bureaus collaborated to introduce VantageScore as an alternative scoring model, solidifying the role of standardized credit scores.