A Look at the History and Future of the Credit Score

Cropped shot of an attractive young woman using a digital tablet and a credit card to shop online while sitting in her living room at home.
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You may know that your credit score is an important part of your financial life, but have you ever given any thought to how credit scores came to be in the first place? Or what direction they might be going in the future? The truth is that an industry-standard credit score is a late 20th-century invention, although various efforts at determining credit risk have been in place for centuries. However, credit scoring as we now know it may be in for a big change if the Biden administration gets its way, as the president has proposed massive changes in how credit information is collected and used

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Prehistory of the Credit Score

There has always been a need for lenders to check on the ability of borrowers to pay back what they owe. As far back as 1841, the Mercantile Agency collected information from third-party sources to create a profile of a borrower’s “character and assets.” However, many of these “opinions” contained racial, class and gender biases. Around this time, the Dun & Bradstreet company created an alphanumeric system for credit evaluation in an effort to minimize those biases. It wasn’t until the 1900s that credit scoring expanded from businesses to individual consumers. However, early efforts in this area were also plagued with biases, including information on consumers’ political, sexual and social lives.

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The FICO Score

It took all the way until 1989 until the industry-standard FICO score was developed. In that year, the Fair, Isaac Corporation, now known simply as FICO, began working with the three major credit bureaus to develop a uniform, consistent scoring model that was easy to understand. The algorithm developed back in 1989 is nearly the same as the one in use today, with a few minor tweaks. As of 2021, here are the five main components of your FICO score:

  • Payment history: 35%
  • Amount owed: 30%
  • Length of credit history: 15%
  • New credit: 10%
  • Credit mix, 10%

There are various sub-categories of these main divisions that play important roles. Your credit utilization, which reflects the percentage of your available credit that you’re using, is part of the “amount owed” category, and is therefore quite important. 

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The Importance of Your Credit Score

It’s easy to think that a credit score is just some made-up number that doesn’t directly affect your life. Unfortunately, nothing could be further from the truth. If you ever want to borrow money, get an apartment or apply for a job, your credit score could be critical. When you apply for an auto loan or a home mortgage, for example, you’ll get a much better interest rate if you have a top credit score. In some cases, you’ll be flat-out denied for a loan if you have a low credit score. The same is true if you’re looking to rent an apartment: A landlord may not accept your application if your credit history shows you’re a big credit risk. Even some jobs, such as those in the financial services industry, are not available to those with bankruptcies or other black marks on their credit report. The bottom line is that for many normal activities in American society, your credit score is of paramount importance.

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Potential Credit Scoring Changes Under the Biden Administration

If President Joe Biden gets his way, traditional credit scoring as we know it could be a thing of the past. Biden wants to take credit reporting out of the hands of Experian, Equifax and TransUnion and create a new public agency. This new agency would accept other types of payment histories, such as rent and utility payments, to give lenders a more complete picture of a borrower’s financial profile. Biden also wants to create a new algorithm that is nondiscriminatory. The motivation behind Biden’s proposed changes is to make homeownership more universally available. Currently, many Americans are “credit invisible,” or don’t have a credit score. Since members of minority communities and low-income consumers are more likely to be “credit invisible,” the Biden administration is hoping that a more equitable credit reporting system could help integrate these overlooked consumers into the financial system.

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Last updated: June 9, 2021

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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