When Did Credit Scores Start in the US?
Learn how credit assessment evolved in the US, from subjective practices to the standardized models we rely on today.
Credit has long served as a fundamental component of economic activity, allowing individuals and businesses to acquire goods and services with a promise of future payment. The ability to assess an applicant’s capacity and willingness to repay debt is therefore a longstanding need for lenders. Over time, the methods employed to evaluate this creditworthiness have evolved from informal assessments to highly sophisticated, data-driven systems. Understanding this progression sheds light on the origins and development of the standardized credit scoring systems prevalent today.
Early Credit Assessment Practices
Before the emergence of standardized credit scores, credit assessment in the United States relied heavily on personal knowledge and informal networks. Local merchants extended credit based on direct interactions, tracking payment histories in ledgers for their businesses. A customer’s community reputation and character played a significant role in granting credit. This localized approach meant that credit decisions were often subjective and lacked uniformity across different lenders or regions.
As commerce expanded in the 19th century, the need for more formalized information sharing became apparent. Early credit reporting agencies began to emerge, with one notable example being the Mercantile Agency, founded in 1841 and later known as Dun & Bradstreet. These agencies collected basic financial information on businesses and individuals, often through a network of correspondents and informants. They compiled reports that described a borrower’s business dealings, assets, and general reputation, providing a more structured, qualitative basis for credit decisions.
These systems gathered factual data and anecdotal evidence, rather than assigning a numerical score. Lenders reviewed these reports to form their own judgment about a borrower’s risk. The process was labor-intensive and varied significantly from one institution to another, reflecting the absence of a universal metric for evaluating credit risk.
The Advent of Standardized Credit Scoring
The concept of a standardized credit score began to take shape in the mid-20th century, driven by the increasing volume of credit transactions and the desire for more efficient and objective lending decisions. A key moment occurred with engineer Bill Fair and mathematician Earl Isaac. Recognizing the potential of statistical analysis, they co-founded Fair, Isaac and Company (FICO) in 1956. Their innovative approach was to apply mathematical models to predict the likelihood of a borrower defaulting on a loan.
Fair and Isaac developed the first generalized credit scoring system, moving beyond subjective assessments to a data-driven methodology. Their models analyzed consumer financial information: payment history, amounts owed, length of credit history, new credit, and credit mix. By assigning weights to these factors, the models could generate a single numerical score that represented an individual’s credit risk. This system provided a consistent, unbiased, and rapid method for lenders to evaluate credit applications.
These early models were founded on the idea that past behavior could predict future outcomes. Although the initial adoption was gradual, the FICO score offered a significant advantage by streamlining the lending process and reducing the reliance on manual underwriting. This marked the beginning of modern credit scoring.
Credit Scores Gain Widespread Use
After FICO’s development, its integration into the financial system gained momentum from the 1970s onward. Banks and other lending institutions increasingly recognized the efficiency and objectivity that standardized scores offered for making credit decisions. Quickly assessing risk using a consistent metric allowed for faster loan approvals and a more uniform application of lending policies across an organization.
A significant legislative development was the Fair Credit Reporting Act (FCRA) in 1970, which supported wider credit score adoption. This federal law regulated the collection, dissemination, and use of consumer credit information. The FCRA provided consumers rights regarding credit report accuracy and privacy, fostering greater standardization and transparency. By setting clear rules for credit information use, the FCRA created a more reliable environment for credit scoring models to operate, paving the way for widespread acceptance.
Computerization of financial operations also expanded credit score use. Improved data processing allowed lenders to integrate scoring models into automated decision-making processes. This combination of technological advancement, regulatory clarity, and the inherent efficiency of numerical risk assessment propelled credit scores into a central role for various types of lending, from mortgages to credit cards.
Ongoing Evolution of Scoring Models
Since widespread adoption, credit scoring models have undergone continuous development and refinement. FICO periodically releases updated versions of its scoring models, integrating new data points, analytical techniques, and market insights. These updates ensure that the models remain predictive and responsive to changes in consumer financial behavior and the economic landscape. Ongoing enhancements improve the accuracy and fairness of credit risk assessments.
The credit scoring landscape saw alternative models emerge in the early 21st century, diversifying tools for lenders. VantageScore, introduced in 2006, is one example, a collaborative effort by the three major credit bureaus. VantageScore provided lenders another option for assessing creditworthiness, often incorporating different methodologies or data considerations than FICO models. This expansion indicates a natural progression, driven by technological advancements and the search for comprehensive, inclusive risk assessment tools.