The History of Credit Scoring


Lending is an ancient practice. For millennia, people have borrowed in order to make purchases that they otherwise could not immediately pay. During the middle ages, the kings and queens of Europe would borrow to finance new palaces, infrastructure and wars. At the dawn of the industrial age, entrepreneurs would borrow to construct mines, railroads, factories and ultimately finance innovation. Assessment of risk has always been a part of lending. For example, liens were developed in part to make sure that if you were to lend an amount, there would be some security in having that amount returned.

It was not until the beginning of the 20th century that we see formalized risk assessment in the form of credit reporting evolve into something that we would recognize now. From the early 1900’s until the 1960’s, credit reporting was a secretive process in which consumers had no right to see their own credit files. In addition to consumers’ negative credit listings, non-related information was compiled regarding consumer race, religion, sexual orientation and even cleanliness. By 1971, Congress recognized that it was beneficial not only to the consumers but to the lending system that consumers have the right to review and dispute items on their credit reports in order to ensure the best accuracy on those reports. In order to ensure this accuracy, Congress enacted the Fair Credit Reporting Act or FCRA (15 USC 1681) to assist with this purpose.

By the late 1980’s, the Fair Isaac Corporation and Equifax launched a project to make credit reporting more efficient and reliable. This project developed credit scoring using proprietary algorithms to determine the consumer’s credit worthiness. This project ultimately developed into FICO scoring and since 1987 has been widely used by banks and merchants to determine risk in relation to amounts that they are willing to lend to a particular consumer.

The FICO score is a three (3) digit number with a range from 300 to 850. The higher the score the consumer has, the better the lending risk. The best interest rates are generally given to consumers with credit scores over 770. Although anything over 700 is considered a good score.

It is also important to note that your credit scoring can vary from credit bureau to credit bureau because each credit bureau is an independent private business that contracts with credit furnishers (banks, merchants, landlords, etc.) to provide information. Not all credit furnishers will contract with all credit bureaus. The same is true for the credit bureaus. Not all credit bureaus contract with all credit furnishers.

With the advent of credit scoring it has become increasingly important to know what is on your credit report and your credit scores. With this in mind, in 2003, Congress recognized that it was important for consumers to have access to their credit reports and their credit scores and enacted the Fair and Accurate Credit Transactions Act or FACTA. FACTA amended the FCRA to provide that consumers could get a free copy of their credit reports once per year. Consumers are also able to purchase their credit scores for a fair and reasonable fee.

We can expect as we proceed into the 21st century that credit reporting and scoring will continue to evolve and Lexington Law Firm will be there to assist its clients in maintaining fair, accurate and substantiated credit reports.