The history of credit scores
Before the age of credit scores and scoring models, many people used their word as a way to bind them to their payments, such as an "IOU." Maybe you've seen old movies where characters tell the barkeep to "put it on my tab" —this "tab" is, in a sense, a form of credit. Your word and trust was your "contract" — and the consequences of not paying someone back were generally more dire than having a lower credit score!
You might be wondering — how did things change over time? In this article, you'll learn about:
- The origins of credit reporting
- When credit scores were invented
- The first credit bureau
- How credit has changed over time
The origins of credit reporting
Credit reporting began before there were plastic cards and digital wallets. Transactions began to be noted in the 1800s as people first started to report them. Prior to today's credit cards, forms of credit included:
- Charge coins (1860s)
- Money orders (1880s)
- Traveler's cheques (1890s)
- Charge plates (1930s)
The Mercantile Agency was founded in 1841 to help keep track of information about consumers, borrowers and lenders throughout New York City. This was deemed necessary due to merchants overusing their credit. And while the credit information of this era was important, it was often subjective and therefore didn't always provide helpful guidance.
As more large businesses formed, there was a greater need for regulation. The Federal Trade Commission (FTC) was created in 1914 as a way to protect both consumers and merchants and encourage fair competition. The FTC also enacted important guidance and rules about credit reporting, such as the Fair Credit Reporting Act (FCRA).
The Fair Credit Reporting Act
As credit reporting became more prominent in the country (and credit bureaus began to form) there was a need to standardize rules and regulations. FCRA, enacted in 1970, came about to meet the needs of consumers by making information from the credit bureaus transparent to the public. It helped jumpstart rules and guidelines for the bureaus to follow.
The first credit cards began developing in the 1950s, in various forms — first in cardboard in 1959, then later came plastic.
In 1956, the Diners' Club card was the first card used commercially to help pay for dinner at participating restaurants without the need for cash. Starting in 1958, companies like American Express began to introduce consumers to both charge cards and revolving credit cards.
When were credit scores invented?
Credit bureaus began popping up across the U.S. as reporting became more prevalent. They played an important role in collecting the information, but had a hard time figuring out the best way to compare the data in a way that made sense. They needed a method to help assess creditworthiness.
That's where Bill Fair, an engineer, and Earl Isaac, a mathematician come into play. They founded the Fair Isaac Corporation (FICO) in in 1956 where they developed a credit scoring system to help standardize a way to calculate a score and categorize it. The company started selling their method to lenders in 1958, which then became a regularly used method by credit reporting agencies in 1970s.
The first credit bureau
Following upon the advances of the Mercantile Agency, the first consumer reporting credit bureau, the Retail Credit Company (RCC), was founded in 1899. The RCC began because of the need for handling large pools of data around loans, store credit and installment plans. The RCC later became what we know today as Equifax®.
Today, your credit report comes from one of the three main credit bureaus—Experian™, TransUnion® or Equifax. At Chase, Experian provides you with a credit report when you enroll in Chase Credit Journey®. You can learn more about your credit score and how to improve it, as well as monitor your credit using this free online tool.
How has credit changed over time?
Credit and credit scores originated with the idea that if someone lends you money, you'll pay them back. However, with the evolution of credit scores, we now have tools to help establish a person's creditworthiness (your reliability when it comes to paying back your debts).
Credit isn't strictly about money, either. A good credit score, credit history and your creditworthiness are important when it comes to determining eligibility for renting an apartment and becoming employed (through the use of background credit checks).
Other scoring models were later developed, such as the VantageScore®. VantageScore was developed by Experian, Equifax and TransUnion as a predictive model to help estimate how likely a person will repay their debts. It's widely used by lenders, financial institutions and landlords today.
Banks such as Chase use the VantageScore 3.0 model, created in 2013, to help generate credit scores. You can receive your free credit score (and check it whenever you'd like) when you enroll in Credit Journey®, in addition to receiving a credit report and other resources to better understand what your score means.
How credit may be reported in the future
As circumstances and policies change, it's possible that credit bureaus will make adjustments over time as to what is included or not in their reporting. For example, buy now, pay later (BNPL) loans may be included on credit reports, which could shift credit scores in either positive or negative directions.
Finally, as technology — particularly within the sphere of artificial intelligence — continues to advance and accelerate, scoring models may become more sophisticated, precise and rapidly updated.
Credit is not a new concept — the idea of lending to others based on a promise to repay dates back to the beginning of human history (and almost certainly beyond). From cardboard cards to electronic transfers, credit and credit scores continue to evolve with us every day. When you use Credit Journey, you can keep track of how your credit score shifts over time.