Mapping the History of Credit Scores
On the surface, the history of credit scores may not seem to be all that interesting. However, for consumers seeking to boost their attractiveness to lenders for a home or car loan, understanding how credit scores work and how they have changed overtime will prove invaluable in making your next credit application a success. Below is a concise history of how credit scores came about and where they may go in the future.
Beginning in 1980s, credit ratings became more formalized and scientific in terms of assessing the strength of potential borrowers. Before then, human judgment was the prime approach in choosing who received credit and how much. Lenders utilized their personal past experiences with consumers as the criteria in determining whether to extend credit. Of course, this approach had its limitations, given its subjective nature.
Seeing this, lenders began to seek more standardized approaches to empower borrowers across the country, whereby a mathematical approach was employed to score the components on a customer's credit report. This point system served to reduce much of the subjectivity around issuing credit, thereby making lending decisions more focused on actual consumer conduct and credibility.
Credit scoring took a giant leap forward when measurable models were developed that considered various factors in determining credit worthiness. These models were constructed utilizing data from consumers, thereby better predicting their likely credit behavior. This approach has been coupled with enhanced computer applications to streamline the process to such a point that consumers and lenders can determine credit worthiness in a few minutes. Given this trend, credit reporting organizations began to emerge to contribute to the lending infrastructure to enhance the process and offer safeguards to protect both parties involved.
In the past, credit reporting and score development was a cumbersome process. Previously there were five major credit reporting organizations that existed alongside numerous other credit authorities located throughout the United States. Over time, though, the industry began to consolidate, whereby there are now three dominant credit reporting organizations, including Equifax, TransUnion and Experian.
Moreover, in terms of gathering data on purchasing histories, credit reporting agencies literally had to sort through physical receipts from vendors to determine how well consumers paid their bills. For consumers, determining their credit scores involved copious amounts of time and work, whereby they had to make formal appointments to appear in person at an office to meet with an expert. The process was long as many consumers would appear seeking their credit status.
In addition, before technology took hold of the credit score generation process, consumers often had to rebuild their credit histories, if they moved to a new state. In other words, in the event that you moved from Illinois to Florida for a new job, your credit history did not move with you, and thus you would have to start again. In contemporary times, though, you can build on your credit as your life and career evolve seamlessly
Changes in Regulation
By 1970, when the Fair Credit Reporting Act was passed, the methodology had been streamlined and more consumer-friendly regulations were establish. It formalized what data credit issuers can report and to what extent as well as how to adjust mishaps. Further, it compelled lenders to provide customers with documented reports of their credit status. Consumers received more support in 2003 with the passage of the Fair and Accurate Credit Transaction Act, which enabled every consumer to receive a free copy of their credit report every 12 months from the three major agencies.
Presently, designers of scoring models audit a set of buyers - frequently over a million - who have received credit to determine their worthiness. The credit profiles of the buyers who have defaulted on their loans are analyzed to identify trends and factors that contributed to their state. The architects of the system then form factual models that allocate varying weight to each component, whereby these variables are compiled to determine a consumer’s FICO rating. Models for popular loan vehicles such as cars or homes often pivot on a candidates' FICO score. Ultimately, the developers of FICO model and similar applications strive to employ the most compelling set of factors from a consumer’s past record to best determine their credit worthiness.