Have you ever wondered where Credit Scores came from? Take a sneak peek into the history of and evolution of Credit Scores!
Ah, the Credit Score! It has been the talk of the town in the recent past, and rightfully so! It’s the one thing that gives banks an instant reflection of how credit-worthy an individual is. It also helps consumers like us to understand where we stand and how good or bad our chances are of leveraging financial credit from institutions.
With all this buzz surrounding Credit Scores, it’s only natural to pause and ponder, “Where did Credit Scores magically come from?” While it’s true that you may have not have heard of it as much a few years ago, the concept of Credit Scores has been around for quite a while.
When you dig deeper, more questions come to mind. For instance, what did people or institutions do before Credit Scores? How did the Credit Score come into being? Well, we’ve traced out the whole story for you, so read on, good people!
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Pre-Credit Score Era
Before the concept of Credit Scores surfaced, lending decisions were in the hands of loan officers who worked at banks. This meant that the customers had to come down to the bank and discuss their need for a loan with the loan officer, and the latter would take a call on whether or not the customer is worthy of a loan or not based on their meeting. It’s quite clear here that this approach was centred on individual judgement – not the fairest way to carry out banking, one could say! Why? Well, it invited room for error in judgement as well as discrimination in terms of race, gender, etc.
The Need for a More Statistical Approach
With the earlier methods of lending proving to be problematic in the long run, two statisticians, namely Bill Fair and Earl Isaac, got together and brewed up various ideas that could help pre-determine whether a person is creditworthy or not based on his or her behaviour. This seemed to pave the way for something more fool proof.
The FICO Score
Having conceived their idea, Bill and Earl decided to establish themselves by forming FICO (Fair Isaac Corporation), a data analytics company that would help lenders take informed decisions in connection with credit products. Their number came to be known as the FICO Score.
Soon enough, more and more institutions realised the importance of Credit Scores, and top credit bureaus including the likes of Experian got together and formulated a rehashed version of the FICO Score in 1989.
The Rise of Credit Scores
The need to overcome the negative outcomes of subjective lending decisions paved the way for the Credit Score. It’s interesting to note that Credit Reports existed way before the advent of Credit Scores; it’s just that they didn’t result in a final takeaway number. Over time, Credit Scores were adapted into the world of finance and it clearly seemed to bring in a much more structural approach to lending.
Though some feared that genuine cases, which loan officers would consider after a personal discussion, could not be accommodated with the more objective Credit Score approach, the latter did see a rise in popularity. Soon enough, leading credit bureaus like Experian formulated Credit Reports which incorporated the Credit Score concept.
Evolution and Incorporations
As the years passed, the room for revisions and refinements grew. For instance, earlier, Credit Scores did not consider the telecom, utility and rent payments found on your Credit Report. Eventually, Credit Scores became far more inclusive – for instance, if you do pay your rent, utility bills or rent amount on time, your score will be positively affected.
Of course, technology also influenced Credit Scores. The internet allowed people to access their Credit Reports from the comfort of their homes. Online Credit Reports became a tool of convenience not only for institutions but also for customers.
The Need for Disclosure of Credit Scores
The Fair Credit Reporting Act, 2011 stated that if a lender rejects your credit application on the basis of your Credit Score, then the lender has to issue a notice to you that mentions the exact Credit Score in numbers.
With consumers becoming more and more aware of Credit Scores in the 1990s, the demand to find out where they stand grew. Back then, you’d have to register or pay a membership to gain access to your Credit Scores.
Additional Reading: 5 Ways To Improve Your Credit Score
FREE Access to Credit Scores
Thankfully, with websites such as BankBazaar.com around today, you can get your Experian Credit Score for FREE in less than 3 minutes.
So, how much has the world of credit information changed since the inception and evolution of Credit Scores?
To absorb the overall impact and influence of Credit Scores on our lives, let’s use this comparison. In the early 1900s, the telephone was still a recent invention, and people in America leveraged this technological development by setting up a state-of-the-art telephone number that people could use to call and have the operators read out Credit Reports over the phone.
Fast forward to today, and you have access to your Credit Score for free as well as a detailed Credit Report through your mobile phone regardless of where you are. What’s more? All this happens in less than 3 minutes. That’s where we are right now!
As customers of the new generation, we’re more informed about our financial situation and credit-worthiness because we’re empowered by tools that can help us always make educated banking decisions. Credit Scores have obviously also transformed the way banks exercise their financial products. Overall, there’s a general sense of transparency and unanimity in the world of credit today.
Where we’ll be tomorrow, one can only guess. However, one thing’s for sure; Credit Scores are here to stay. If you have plans to opt for a financial product such as a Home Loan or Car Loan in the future, you’d better stay informed and updated about your Credit Score and plan your finances accordingly.
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