The History of Credit Reporting & Scores

Have you ever wondered where credit scores originated from?

By the 1960’s, Americans had become much more mobile and consumers were traveling more and more, and from state to state. As a result, lenders had to rely more heavily on the information they received from the credit bureaus since they couldn’t always interview applicants in person. But the credit bureaus would collect data secretly and the data they collected on individuals was often based on hearsay and misinformation.

For example, they would ask a representative from the local Welcome Wagon to report back to them on the clothing, furniture, and quality of an individual’s home, along with any feedback on their character and personality. Since the bureaus were reporting enormous amounts of misinformation, bad decisions were being made. To make things worse, the credit bureaus were also under no legal obligation to allow consumers a view of their own credit records. As time went on and more consumers were borrowing money to buy homes, the government started to investigate racial discrimination cases in regards to home loans. Data collection practices were being analyzed and laws came into effect to protect consumers and also to allow them to see and correct errors in their credit history. This is when the Fair Credit Reporting Act forced the Credit Reporting Agencies to clean up inaccuracies. Once the CRA’s started gathering more reliable information, lenders depended more on their data and less on the gut feeling of local underwriters. Since Congress was putting pressure on lenders regarding the practice of discrimination, the banking industry required a fair and objective measurement of credit worthiness that would protect them from being sued.
Fair Isaac & Company took advantage of this need for a tool that could quantify a consumer’s risk level by developing a numerical score based solely on the information gathered by the CRA’s. This is how the FICO scores came about in the 1980’s.

An objective credit reporting system.

A major reason that the credit reporting system we have today was created is due to fairness and making sure that everyone has an equal and accurate chance at receiving financing. To make sure that lending decisions were being made based on merit and past payment behavior, rather than a judgement of character.