Evolution of the Credit Score: Comparing Old and New Criteria

Evolution of the Credit Score: Comparing Old and New Criteria
Fiona Staff6/8/2023

If you’ve ever applied for a loan, tried to open a new credit card account, considered refinancing your mortgage, or even applied for an auto insurance policy, you’ve at least been exposed to the power that your credit score can hold. But how exactly did the concept of credit scores begin and how have credit scores changed over time, finally evolving into the products they are today?

Here’s a look at the evolution of the credit score and how today’s scoring criteria compare to decades ago.

Credit Scores Today

Your credit score is a three-digit number that represents your creditworthiness, or how much risk you are likely to pose to a lender if you are allowed to borrow money. This number is calculated using proprietary scoring models, which pull from factors such as your:

  • Current debt burden

  • Average age of accounts

  • Mix of different account types

  • Recent credit inquiries

  • New accounts

  • Available and utilized credit

While there are hundreds of different scoring models available, two of the most common include the FICO Score (provided by Fair Isaac Corporation) and the VantageScore.

Credit scores are an integral part of your financial journey today. A credit score may be utilized if you are requesting a loan, line of credit, or even just trying to open an account for utilities or services, such as a cell phone. 

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The History of Credit Scores

The very first credit score was designed in 1841 by the Mercantile Agency of New York. It was a commercial credit scoring agency, helping businesses vet potential business customers and help avoid potential losses. The Mercantile Agency (later renamed R.G. Dun & Co and merging to become Dun & Bradstreet) utilized factors such as the businessman’s

  • Age

  • Ethnicity

  • Marital status

  • Credit history

All of this information was then kept in one centralized location.

As time went on and department stores gained popularity, there became a need for a credit system involving consumers, as well. This allowed department stores to extend credit to their customers with the confidence that they would be repaid.

This gave the Atlanta Retail Credit Company (RCC) the idea to compile data on millions of American consumers. This data included not only credit factors but also the consumers’ ethnicity, social status, political affiliations, and even their sexual lives. RCC was the first credit data company to plan to computerize this data, as well, which was met with much backlash.

The Fair Credit Reporting Act

The Fair Credit Reporting Act was passed in 1970, aimed at — as the name implies — leveling the playing field and making the credit reporting process fairer across the board. This meant eliminating consumer data regarding race, sexuality, political affiliation, and disabilities. 

As a result, the RCC data model could no longer operate in the same manner. Its reputation was impacted and, in response, RCC changed its name to one you may recognize today: Equifax.

Equifax was later joined by today’s other two credit reporting agencies you may have also heard of, Experian and TransUnion. Today, these three form the trifecta that manages nearly all of your pertinent credit history data. 

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The Introduction of FICO

Fair, Isaac, and Company was founded in 1956 and evolved into a technology company that, by the late 80s, was well-known and respected. In 1989, the three credit reporting agencies called on this company to create an industry-standard strategy for credit reporting. 

This included a credit scoring algorithm and calculation system, which pulled from data that the three scoring agencies provided on consumers. The company became the Fair Isaac Corporation (also known as FICO) and the algorithm became known as the FICO credit scoring system.

Today, FICO is the most widely used credit scoring model by lenders.

How Credit Scoring Criteria Has Changed

When credit scoring first began, it evaluated a slew of personal factors for each borrower, many of which weren’t actually pertinent to one’s creditworthiness.

For example, the RCC model tracked consumers’ political affiliations and social status. Once the Fair Credit Reporting Act was introduced, though, this data could no longer be attached to one’s credit scoring profile.

Today, credit scores are based off of a consumer’s past credit history alone. Demographics, disabilities, and sexual orientation are not taken into account, but how long you’ve had credit based accounts, how much debt you have, and whether you’ve paid your bills on time are considered.

Today, there is also more than one credit scoring model used. While FICO is the oldest and most common, today there are actually hundreds of possible credit scoring models that a lender could use. You may also find credit scores offered by credit card companies, banks, and other entities… but the actual calculations may not be the same as whatever model your next lender uses.

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Bottom Line

Credit scores were designed so that companies could vet the customers they were selling to, especially if they were extending credit to those customers. While credit scores began as a way for merchants to evaluate business customers, they have evolved into a useful tool for evaluating everyday consumers, as well.

Credit scoring models take into account the data that’s stored by the credit reporting agencies, though each scoring model may weigh those factors differently. Either way, the best way to boost your score today is to ensure that you make your payments on time, limit the debt you carry, only open new accounts when you need them, and maintain a healthy credit history for as long as you can.

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