By Eva Norlyk Herriott
What a difference a few hundred years make. Like our forebears of yesteryear, we hold certain truths to be self-evident: that we’re all endowed with certain unalienable rights and that all men (and women) are created equal—as long as our credit score meets a certain minimum benchmark.
Credit scores are just little three-digit numbers, but for better and worse, they govern our financial life, determining whether we’ll get approved for everything from a new mortgage, auto loan, or credit card; and even whether we’ll be able to land a new apartment or get that new job.
There was a time, in a galaxy not too far away, when credit scores did not exist and banks and other lenders had to rely on human judgment alone to decide who was eligible for credit. The concept of credit scoring was first introduced in 1958, when the Fair Isaac Corporation sent a letter to the 50 biggest American credit grantors inviting them to learn about their new concept of credit scoring. The idea was to create statistical models using payment information from thousands of borrowers. Fair Isaac suggested that this would make it possible to predict how a consumer would handle credit based on the behavior of people with a similar credit profile.
Only one company replied to the letter.
From there, it was a slow uphill climb during the 60s and 70s as Fair Isaac introduced credit scoring systems to individual banks and mail order companies like Montgomery Ward. It wasn’t until 1989 that the first general-purpose FICO score had its debut and it would be another two years, before all three major US credit reporting agencies, Equifax, Trans Union, and Experian, introduced some type of credit scoring system. Once credit scores were more generally available, however, they quickly grew in popularity. By 1995, mortgage giants Fannie Mae and Freddie Mac were recommending use of FICO scores for lenders’ evaluation of mortgage applications. The rest, as they say, is history.
Like them or hate them, credit scores in some ways have been a great equalizer. Prior to credit scores, lending decisions were made in large part at the discretion of bank loan officers taking the application and processing the loan. This was imperfect at best. Firstly, the system only worked for approving local loans where people could be personally interviewed, which proved to be very impractical, particularly for credit card applications.
Worse, leaving lending decisions in the hands of individual loan officers often led to age or race discrimination, particularly in mortgage lending and in the practices of debt collectors. When the FICO score was released, it gave lenders an easy, impartial and consistent way to evaluate credit card and other loan applications without guesswork or potential prejudice. FICO scores offered a means to level the playing field and give everyone an equal chance of credit—based not on race or age, but only on how responsibly they manage credit.
Today, there are several types of credit scores, but FICO scores remain the most widely used. While not perfect, credit scores have proven quite effective at predicting a person’s future credit behavior and evaluating his or her creditworthiness.
Credit scores didn’t just level the playing field and make credit available to people based on merit rather than their age or the color of their skin. The large-scale introduction of credit scores has made credit approval extremely fast and efficient, sometimes even instant, as in the case of online credit card applications. In this way, the introduction of credit scores helped pave the way for the credit card revolution and the vast expansion of consumer credit lines we’ve witnessed over the past two decades.
