When Were Credit Scores Created?

Today, credit scores are essential for being issued a mortgage or credit card. Credit assessment and data collection have existed for many centuries, but they have shaped the continued evolution of credit scoring into a modern-day phenomenon.

This article is a brief history of credit ratings, starting with the credit appraisal concept and continuing through the formation and evolution of FICO scores.

The Origins of Credit Evaluation

Credit referencing also had yet to develop before the advanced credit scoring system was formed. Therefore, lenders adopted other means of determining a borrower’s cash-flow capacity to repay loans. In the nineteenth century, the success of merchants and bankers depended on relationships, local reputation, and word-of-mouth.

Decisions regarding a borrower’s credibility are based on faceguards, who are prone to prejudices based on the borrower’s gender, class, or status. Credit differed in quality and was often discriminated against because the metrics used were not uniform.

The Birth of Credit Reporting Agencies

The first step towards an organized credit rating system unfolded in 1841 when the Mercantile Agency was established as a credit reporting agency only. Placing companies, not people, at the forefront of credit reporting set the stage for the first formal credit reporting system in the United States.

There was a lot of prejudice in the early agencies’ data collection since, apart from the borrower’s financial history, they were also asked questions related to things like their marital status and racial origin.

Consumer credit reporting emerged when consumer credit, especially goods credit, expanded in the last quarter of the nineteenth century in response to the philosophies of department stores and installment houses. Those local credit agencies began to gather consumer information because merchants sought a means of tracking their customers’ repayment behaviors.

The Development of Credit Scoring Models

The way credit reporting was done also began to shift significantly with the onset of mid-twentieth-century computerized methods. In the 1960s, over 2000 localized credit bureaus were throughout the United States.

However, with the dawn of the personal computer, this industry standardized the collecting and warehousing credit information on consumers through consolidation, which meant merit bureaus. This laid the base for any credit scoring that is implemented today. This change set the foundation for today’s credit scoring models.

Credit scoring models, which lenders use to assess credit risk more quantitatively and consistently, were first created in the 1950s. Customer data were statistically processed to predict the likelihood of payback of these initial models. However, credit scoring became very popular once the FICO score was formulated.

Introduction of the FICO Score in 1956

Bill Fair, an engineer, and Earl Isaac, a mathematician, founded and formed the Fair Isaac Corporation in 1956, still called FICO today. They created the first credit scoring model based on algorithms to evaluate credit risk objectively. When FICO first started, they tailored scoring models to the unique requirements of individual businesses.

In 1989, FICO collaborated with Equifax, Experian, and TransUnion to develop a generally applicable generalized credit scoring model. This event started the current FICO score, which has since become the norm. Larger banking bodies, such as Fannie Mae and Freddie Mac, adopted FICO ratings within mid-1994, thus carving their place in the lending industry.

Read related blogs: 450 Credit Score Explained: Steps to Rebuild Your Credit

The Evolution of Credit Scores Over Time

Credit score systems have evolved since the introduction of FICO scores to address any new financial products and behavioral trends. Some of the product lines that FICO offers companies are FICO Score 8, which is used for most lending decisions, and FICO Score, which uses rental history and counts medical collection less than scores 4 and 5.

Some other scoring formulations have also been developed, although VantageScore is the most common among them. Banks are shifting toward VantageScore, FICO’s competitor, introduced in 2006 by the three major credit reporting agencies. There are also newer versions like VantageScore 4.0; in this version of the model, extra-trended data is used to get better predictions on consumer credit behavior.

Conclusion

Credit scores—especially FICO scores—are entirely different from previous ways of assessing creditworthiness as they are facts. Over the years, credit scoring advancements have ensured that clients get equal treatment, bias is eradicated, and favorable financing has been offered to millions.

Consumers’ credit standing will be affected most by changes in credit scoring models triggered by market changes. With Beem, you can securely take control of your financial destiny. Stop gambling with your credit and take advantage of Beem’s economic benefits.

People Also Ask

What was the first credit score ever used?

The FICO score was developed in 1989 and became the first credit score available to all consumers.

How did credit scores change the lending industry?

Due to the standardization of the method of granting credit ratings, credit ratings helped depersonalize and bias lending decisions.

What other scoring models exist besides FICO?

Initiated in 2006 by the three dominant credit bureaus, VantageScore is the more recognized model of FICO.