NEW YORK (MainStreet) — Everyone is obsessed with his own credit score, the three-digit number that supposedly summarizes your credit-worthiness and overall financial responsibility. But where did the credit score come from? Who decided that the infamous "five factors" that make up your credit score were important? What did banks and other lenders do before they had a credit score to go by, and why did they abandon that model? All this and more will be answered as we explore the secret history of credit scores.
Credit scores arose in the 1950s
For most of the modern economy, there was no such thing as a credit score. Lending decisions were made by loan officers who worked at banks. "If you wanted to buy a house or a car, you would go to the bank and you would talk to a fairly vigilant, cynical banker," says Randy Padawer, a consumer advocate with LexingtonLaw. This made determining who did and did not get credit largely a matter of individual judgment.
There were two major problems with this model of lending: First, it relied upon an individual loan officer's subjective judgment. This meant it was not a terribly accurate way of determining who actually would and would not repay loans. It also tended to be discriminatory. "There were questions of fairness and racial and gender bias on credit applications," Padawer says.
Enter Bill Fair and Earl Isaac. These two statisticians made a number of correlations between which behaviors made a person a good credit risk and which made them a bad credit risk. And for the most part, their predictions were accurate. But it wasn’t really until the 1970s that credit scores became as important in lending as they are now. The modern iteration of the FICO score, based on credit files from the three credit bureaus — Equifax, Experian and TransUnion — was introduced in 1989.