When credit scores came into existence and where they first appeared is a long story – one that actually starts in the mid-1800’s. Although there’s not enough space here to review every step leading to the FICO® Score, in particular, there are some facts to its final development that are of great interest.
So let’s start as close to the beginning as possible…
The Start of Credit in the 1800’s
Back in the 1800’s, most credit was conducted by businesses, not consumers. As business transactions increased, commercial lenders needed to create a way to standardize credit evaluation. In 1841, the Mercantile Agency solicited information from correspondents throughout the country in order to systemize a borrower’s “character and assets”. In the end, this data was considered to be too subjective as many of the opinions noted racial, class and gender biases. Subscribers to the Mercantile Agency (renamed R.G. Dun & Co.) and its rival, the Bradstreet Company, demanded a simplified evaluation method. It was during this time that two important things happened: the two companies merged into Dun & Bradstreet and an alphanumeric system for credit evaluation was created.
Credit History continues into the 1900’s
As the everyday citizen’s income increased and they desired to have more of the “middle-class” life, it was time for the credit-reporting sector to develop ways to evaluate not just businesses, but consumers as well. Atlanta’s Retail Credit Company (RCC) did just that by collecting data on millions of Americans. However, in addition to credit information, the company also gathered data on individuals’ social, political and sexual lives, too. When RCC revealed plans to computerize this data, the government wouldn’t allow it to happen.
A New Law in the 1970’s
In 1970, the Fair Credit Reporting Act (FCRA) was passed requiring credit reporting bureaus (like RCC) to open their files to the public; expunge data on race, sexuality and disability; and delete negative information after a specified period of time. Although the FCRA had a slight negative effect on RCC’s reputation, the company remained intact and, in 1975, changed its name to Equifax. Over time, Experian and TransUnion were created and these companies are now considered the top three credit reporting agencies.
FICO Scores in 1989
Even with such immense demand for the services of these agencies, they continued to have difficulty interpreting and comparing their reports. To help find an industry-standard credit score (that included a consistent credit-scoring algorithm), they began working with a well-known tech company, founded in 1956, called Fair, Isaac, and Company – known today as FICO. The result was the FICO® Score which developed and utilized an algorithm very similar to the formula still used today.
FICO® Scores, used by creditors to assess an individual’s credit risk, are used by 90% of top lenders. It is the most widely used broad-based score and plays a critical role in billions of lending decisions every year. As of this writing, FICO® Score 9 is the most current and predictive FICO® Score available.