When Was the Credit Score Invented? A Historical Look

Introduction

A credit score is a three-digit number that lenders use to determine a person’s creditworthiness. It’s based on an individual’s credit history and other financial factors such as debt levels, payment history, and open accounts. Credit scores are used by banks, credit unions, and other lenders to evaluate loan applications and decide whether or not to approve them. Understanding the origin of credit scores and how they have evolved over time can be helpful in understanding why they are so important today.

A Historical Look at the Origin of Credit Scores

The development of credit scores can be traced back to the early 20th century. At that time, lenders relied on their own internal systems for evaluating loan applicants. These systems often relied on subjective criteria such as a person’s reputation, character, and connections. This made it difficult for lenders to objectively assess the creditworthiness of potential borrowers.

It wasn’t until the mid-1940s that the concept of credit scoring began to take shape. At that time, the Department of Defense began using a system called “Risk Score” to evaluate loan applicants. This system was based on objective criteria such as a person’s credit history, income, and debt levels. The Risk Score system allowed lenders to make more informed decisions about which borrowers to approve.

How Credit Scores Came to Be

The evolution of credit scores continued in the 1950s with the emergence of a new type of scoring system called the “Fair, Isaac & Company (FICO)” score. The FICO score was developed by the Fair, Isaac Corporation and was designed to provide lenders with a more accurate way to evaluate loan applicants. The FICO score looked at a person’s credit history, payment history, and other financial factors to determine their creditworthiness.

In the 1980s, credit bureaus began offering their own versions of credit scores. These scores were based on the same criteria as the FICO score but had different names such as the VantageScore and Experian credit score. Today, most lenders rely on the FICO score to evaluate loan applications.

Tracing the Origins of Credit Scores

The emergence of the Fair Isaac Corporation and its FICO score marked a major milestone in the development of credit scores. According to a study from the Federal Reserve Bank of Philadelphia, “The introduction of the FICO score in 1989 revolutionized the consumer credit market by providing lenders with a standard measure of credit risk.” The FICO score quickly gained traction among lenders, who found it to be a reliable and efficient way to evaluate loan applicants.

Credit bureaus also played an important role in the evolution of credit scores. They began offering their own versions of credit scores in the 1980s, which gave lenders another option for assessing creditworthiness. Today, the three major credit bureaus—Equifax, Experian, and TransUnion—all offer their own versions of credit scores.

Conclusion

The concept of credit scores has been around for decades and has gone through many changes over the years. The first credit scores appeared in the 1940s and were based on objective criteria such as a person’s credit history and debt levels. The emergence of the Fair Isaac Corporation and its FICO score in 1989 revolutionized the consumer credit market by providing lenders with a standard measure of credit risk. Credit bureaus also began offering their own versions of credit scores in the 1980s, giving lenders more options for assessing creditworthiness. Today, credit scores are used by lenders to evaluate loan applications and decide whether or not to approve them.