When did credit scores start? A brief overview of the long history

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Whether you’re getting your very first credit card or applying for a mortgage, your credit score plays an important role in determining whether or not you’ll be able to meet many of your financial goals. Your credit report and that three-digit credit score number can also make a big difference in how much interest you’ll pay on loans as well as the types of loans or credit cards you qualify for.

Credit reports and credit scores as we know them today are part of a long history of merchants and lenders collecting information and using it to assess whether a potential borrower would be able to repay their loans in fully and on time.

Select spoke with Josh Lauer, associate professor of communication at the University of New Hampshire and author of “Solvable: A History of Consumer Surveillance and Financial Identity in America“, to better understand how credit scoring and credit reports came into being, and how the two eventually became such an important part of our lives.

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The rise of credit reports

Before there was a credit score, there were commercial credit reports. Unlike consumer credit reports, where individuals are rated based on their level of credit risk, commercial credit reports were originally used by merchants to assess the creditworthiness of potential business customers.

In 1841, the Mercantile Agency was founded as one of the first commercial credit reporting agencies, using people known as correspondents to collect information on lenders and borrowers across the country. In a way, it worked much like a modern credit reporting agency, collecting information on a businessman’s marital status, ethnicity, credit history, and age, which were then entered into a centralized registry in one location, New York City.

This type of credit report was based on subjective methods ratings – in other words, pen pals would provide ratings of people based on their racial background, gender, and morality.

It wasn’t until the late 19th century, when department stores and mass retailers grew in popularity, that consumer credit reporting really took off.

Some mass retailers were installment houses, which sold items such as furniture and medicine to customers via installment loans. Retailers needed a way to attract consumers and ensure they would be reimbursed. So they gathered information about their customers and submitted it to a local credit bureau.

Although there are three major consumer credit bureaus today – Equifax, Experian and TransUnion – it would actually take hundreds of years to develop a centralized national credit bureau.

Credit rating settles

It wasn’t until credit reporting became computerized in the 1960s that the industry consolidated.

In the 1960s, there were over 2,000 credit bureaus in the United States. Over the next 20 years, that number would shrink to five and eventually to the three major credit bureaus that exist today, Lauer says.

“Before [the 1960s], all the files were in filing cabinets, on papers and cards, says Lauer. “So we have these offices that have a lot of money. They come to a town and buy all the local credit bureaus with all [of] their information and then computerize it.”

However, it would take longer for credit scoring to gain popularity in the United States, as lenders were reluctant to abandon their use of character ratings in assessing a person’s creditworthiness.

Today, FICO scores are considered the most widely used type of credit score.

According to Sally Taylor, vice president and general manager of FICO Scores, the company was founded in 1956 and initially worked with commercial clients to develop company-specific credit scoring models.

A company would engage FICO and then use its customer files to produce an individualized model, which would then be used to calculate the credit risk level of its customers, Lauer explains.

In 1989, FICO worked with the national credit bureaus to create a credit score model that could be used to rate all consumers – this is when the first generalizable credit score was born.

“The idea that there is a generic model means that many different businesses can use a credit score for the first time, which makes credit scoring much more accessible and popular among lenders,” Lauer says.

FICO scores were later cemented as a crucial part of the financial decision-making process when Fannie Mae and Freddie Mac began requiring mortgage applicants to submit them in the mid-1990s.

Credit Scores Today

Today, there are many types of credit reporting models used by various lenders. FICO, however, remains one of the most widely used – the company says its scores are used by 90% of major lenders.

FICO credit scoring models have evolved since 1989 to take into account the constant evolution of consumer behavior. Today, scores range from 300 to 850, with higher scores indicating a greater likelihood that a consumer will repay their loan in full and on time.

Unlike credit reporting and credit reporting methods of the past, factors such as race, age, gender, and marital status are no longer considered. Instead, the following five factors are used to calculate an individual’s FICO credit score:

  1. Payment history (35%): Whether or not you paid your old credit accounts on time
  2. Amounts due (30%): The total amount of credit and loans you are currently using compared to your total credit limit, also known as utilization rate.
  3. Length of credit history (15%): The length of time you have had credit
  4. New credit (10%): How often you request and open new accounts
  5. Composition of credit (10%): The variety of credit products available to you, including credit cards, installment loans, finance company accounts, and mortgages

In recent years, efforts have also been made to include data that is not typically used to calculate credit scores. *Experian Boost™ was launched in 2019, allowing users to include recurring payments such as utility bills and monthly subscription payments on their Experian credit report.

Experian Boost™

On Experian’s secure site

  • Cost

  • Average increase in credit score

    13 points, although results vary

  • Affected credit report

  • Credit score model used

In the United States, 26 million Americans are considered “invisible” credit due to a lack of credit history, with the problem affecting black, Hispanic, and low-income people more. Experian Boost can be a useful tool for those with poor credit scores – or no credit scores at all – as it allows information regarding on-time payments to be included on their credit reports, which can help increase it a bit.

For those who want more detailed information about their credit rating and monitor changes to their credit report, consider a credit monitoring service. Both Free Credit Monitoring Experian and Experian IdentityWorks℠ provide you with warnings of potential fraud that can help protect you against identity theft.

Other free options to view your credit score include Capital One’s CreditWise which shows you your TransUnion VantageScore or Discover the credit score card which shows your FICO score from Experian.

Experian Dark Web Scan + Credit Monitoring

On Experian’s secure site

  • Cost

  • Credit bureaus monitored

  • Credit score model used

  • Dark web analysis

  • Identity insurance

Experian IdentityWorks℠

On Experian’s secure site

  • Cost

    $9.99 to $29.99 per month

  • Credit bureaus monitored

    Experian for the Plus plan or Experian, Equifax and TransUnion for the Premium plan

  • Credit score model used

  • Dark web analysis

  • Identity insurance

    Yes, up to $500,000 for the Plus plan and up to $1 million for the Premium plan*

* Identity theft insurance underwritten by subsidiaries of insurance companies or affiliates of American International Group, Inc. (AIG). The description below is a summary and is intended for informational purposes only and does not include all of the terms, conditions and exclusions of the policies described. Please refer to the actual policies for terms, conditions and coverage exclusions. Coverage may not be available in all jurisdictions.

*Results may vary. Some may not see an improvement in scores or approval ratings. Not all lenders use Experian credit reports, and not all lenders use scores impacted by Experian Boost.

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.


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