If you’ve turned on your TV at all in the past decade you’ve doubtless seen tons of ads for Credit Karma. Or, if not them, one of their countless competitors. These sites are ubiquitous and offer a free look at your credit score. As you probably know, your credit score is a three-digit number assigned to you based on your credit history.
Things like credit card payments, bills and financial history get distilled down into an easy-to-parse number. It’s also highly objective, for better or worse, as it takes the personality out of credit. So, when did credit scores become such a big deal?
Back in the day, credit used to be much less formal than it is now. Before the 1950s, if you wanted a loan, you’d go to the bank. You’d sit down with a lending specialist — someone who was supposedly a good judge of character. You’d explain why you wanted a loan, what it was for and how you’d pay it back. Then, the lending agent would make a decision. This was hardly scientific, and, of course, it was subject to discrimination.
Women and people of color, obviously, would have a harder time getting loans that men or white people. In order to correct this unfair system, a pair of statisticians named Earl Isaac and Bill Fair came up with a mathematic way to consider the risk of lending.
Isaac and Fair introduced their credit scoring system in the 1950s. Originally, the banks that adopted it used it as one of many tools to determine liability. For a few decades, however, that was the extent of the use of credit scores. But by the 1970s, the credit industry had grown incredibly.
As such, banks were looking for more mass-market solutions to the problem of liability. Individual banks developed in-house criteria for credit scoring based on Fair and Isaac’s formula.
In 1989, in order to simplify and standardize the industry, the Big Three created the FICO score we know today. Equifax, Experian and TransUnion, three of the biggest credit reporting agencies, worked together to create the FICO scoring system.
Throughout the ’90s and into the modern era, credit scores have been relied upon by banks to determine liability. Since most of the money in any given economy is credit, this kind of standardized score is a necessary evil. While it doesn’t carry the personal touch afforded by score-less lending, it also avoids the pratfalls of individual bias. One must wonder, however, if institutional biases are better or worse in the field of credit.
In any event, we don’t expect credit scores to be going away any time soon. However, as time goes on and reporting becomes more accurate, it seems likely traditional scores will have diminished importance. In general, most modern banks consider factors like how much debt is being carried and who it is owed to. Time will tell if the modern FICO score remains as endemic as it has been for the past 30 years.