Who Came Up With Credit Scores? A Look at Their Origins

Credit scores play a significant role in an individual’s financial life, influencing decisions on loans, mortgages, and credit cards. These three-digit numbers, typically ranging from 300 to 850, provide lenders with a quick assessment of a borrower’s creditworthiness. A higher score generally indicates a lower risk to lenders, which can lead to more favorable terms and interest rates. Understanding their origins offers insight into how credit assessment has evolved.

The Genesis of Credit Reporting

Before standardized credit scores, lenders relied on less formal and often subjective methods to evaluate an individual’s ability to repay debt. Early credit assessment in the 19th century was based on personal reputation and community standing. The Mercantile Agency, founded in 1841, was one of the first organized credit reporting agencies in the United States. It collected information, often relying on correspondents to gather subjective data, including details about an individual’s background or moral character.

By the early 20th century, the expansion of retail credit led to the formation of numerous local credit bureaus. These entities, often associations of merchants, gathered rudimentary financial data and shared payment histories. While these early bureaus provided some level of information sharing, there was no universal system to standardize credit risk assessment, leading to inconsistencies and potential biases in lending decisions.

The Pioneering Work of Fair, Isaac and Company (FICO)

The need for a more objective, data-driven approach to credit assessment led to the work of Fair, Isaac and Company. William R. Fair, an engineer, and Earl J. Isaac, a mathematician, founded their company in 1956 with a vision to apply statistical analysis to business decisions. Their goal was to create a standardized credit scoring system that would bring objectivity and efficiency to lending practices.

Fair and Isaac introduced their first credit scoring system in 1958, demonstrating that their statistical models could accurately predict payment behavior. This approach allowed creditors to make more informed lending decisions by translating personal and financial histories into a predictive score. The company debuted the first general-purpose FICO score in 1989, which became the most widely used scoring model in the United States. This score is calculated using data from credit reports and considers factors such as payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).

The Emergence of Other Scoring Models

While FICO established the initial standard, the credit scoring landscape includes other models. The three major credit bureaus—Experian, Equifax, and TransUnion—collaborated to create VantageScore in 2006 as an alternative to FICO. This joint venture aimed to provide a more consistent scoring model across all three bureaus and offer a solution for those with limited credit histories.

VantageScore models predict the likelihood of loan default using statistical analysis on consumer credit files. VantageScore uses different proprietary analytical methods and may weigh factors differently. For instance, VantageScore can generate a score with just one month of credit history and one reported account, making it more accessible for individuals new to credit. The development of these alternative scores reflects ongoing efforts to refine credit assessment and cater to diverse consumer profiles.