When Did Credit Scores Become a Thing?

Credit scores are a standard tool credit providers use to evaluate a borrower’s creditworthiness and ability to repay the loan. Despite credit’s lengthy history, they are a more modern innovation.

The initial consumer credit scores were launched in the second half of the twentieth century, marking a substantial evolution in credit evaluation methodologies. Let’s trace the origins of credit ratings and the turning points that molded contemporary lending methods.

Early Forms of Credit Evaluation

Credit choices used to be heavily dependent on subjective factors before the creation of credit ratings. In the mid-1800s, lenders mainly relied on a person’s kinship with them and the customer’s reputation to determine whether a person was creditworthy.

Most of the loans given to borrowers and the valuations of merchants and banks from 2005 to 2008 were based on informal networks and word-of-mouth judgments. Therefore, most of the results obtained from them were biased and contradictory. Social factors such as race, gender, or class can be used to decide whether to accept or deny credit.

The Emergence of Credit Reporting Agencies

The first centralized credit reporting agency was formed in 1841. To assist businesses in assessing credit risks, these agencies compiled data regarding people’s borrowing patterns, payback records, and personal histories. It can be as old as the early twentieth century, when companies began receiving credit reports from credit reporting agencies.

For example, Equifax, TransUnion, and Experian needed to collect consumer information in a structured way earlier. Nevertheless, no objective scoring system existed, so these reports remained open to interpretation.

Introduction of the FICO Score in 1956

The history of credit evaluation reached a turning point when an engineer, Bill Fair, and a mathematician, Eal Isaac, founded the Fair Isaac Corporation (FICO) in 1956. They discovered that a customer’s credit score can be found using only algorithms.

Consequently, the borrower’s credit record may be used to provide an accurate appraisal of their creditworthiness, given by the FICO score. The initial FICO score was released to traditional credit lenders in 1989, which flipped the loan qualification process on its head and, thus, eradicated bias.

The Expansion of Credit Scoring Models

While other credit scoring models exist, FICO remains the most widely used. Equifax, Experian, and TransUnion, the three largest consumer credit reporting agencies, developed VantageScore in 2006. VantageScore was another way to the FICO version, with a slight difference between them regarding how they provided credit risk scores and that it was more welcoming to the clients with the least comprehensive credit records.

Currently, numerous models offered by FICO and VantageScore are more appropriate for particular sorts of credit, such as mortgages and auto loans.

How Credit Scores Became Standard in Lending?

Credit scores progressively replaced other methods of assessing creditworthiness in the United States banking and lending industries as they proved more accurate and objective. Nearly every financial institution now uses a credit score—FICO, VantageScore, or another model—to evaluate borrowers and establish loan conditions. As such, risk evaluation is now more accessible and visible than before, thus making the loan process more accessible and less complicated for all parties.

Read related blogs: What Is a Good Credit Score? – How to Maintain

Conclusion

This major transition to a relativistic measurement of creditworthiness came about with credit scores, starting with the so-called FICO score in 1989. A data-driven, objective approach that increased lending efficiency and fairness emerged from a formerly subjective procedure. Thanks to the ever-changing credit score algorithms, the banking sector can better evaluate risk and give customers tools to monitor and improve their financial situation.

Beem is a platform that helps people track their credit scores instantly and thus make reasonable decisions regarding their funds. As a result, anyone interested in managing their credit score QoQ should consider using this tool.

People Also Ask

What was used before credit scores?

Lenders used personal judgment, personal references, and informal credit reporting systems to determine creditworthiness before credit ratings.

How have credit scores changed since they were introduced?

Models like FICO Score 9 and VantageScore 4.0 provide updated criteria, allowing credit ratings to become more inclusive, accurate, and responsive to changes in consumer behavior.

Who created the first credit score?

Credit scores were initially developed in 1989 by the Fair Isaac Corporation (FICO). They provide a standardized method for assessing creditworthiness and reduce biases in lending decisions.